Coin Dealer Ethics - Goodwill

This edition of "Coin Dealer Ethics" deals with inheritance; not the kind of inheritance where someone dies and you get their fabulous coin collection, but where a coin dealer decides to retire and sell his business to another person. Should the new owner benefit from that dealer's "goodwill?" Here's the scenario:

Ernest K. of Honest Man Coins (names are fictional) had been in the coin business for 40 years. He had an excellent reputation, and belonged to numerous numismatic associations, including the ANA and PNG. Although his coin business wasn't large, it had a devoted following of customers, and Ernest attended several coin shows each year which helped him broaden his reach and gain access to a wider range of material. When Ernest retired, he sold the coin business to a single buyer, including the stock, the business name and goodwill, the lease to his excellent downtown location (which still had 14 years left on it at a great monthly rate,) and all other assets that belonged to the business (including the customer list, store fixtures, coin safe, etc.) The "stock," of course, was the coins that Ernest had in his inventory, plus a goodly assortment of coin collecting supplies and books. Basically, Ernest sold everything that you'd find in a normal local coin shop, what business salesmen call a "turn-key operation." Unfortunately, less than a month after the sale, Ernest had a massive heart attack and died, leaving his wife very well-off finanacially.

I want to draw your attention to the term "goodwill," as used above. Business goodwill is generally defined as the difference between what a business' assets are worth, and what the actual asking price is. It represents the value of the good name itself, and in Honest Man Coins' case, it included the fact that Ernest's integrity was unimpeachable. Ernest was known to be a conservative coin grader who was reputed to have never sold a single fake or altered coin. In fact, Ernest gave a lifetime guarantee of authenticity for all of his coins, and had never once had to make good on this guarantee. When the new owner, (whose name is Robert D.), took over Honest Man Coins, he would enjoy the "goodwill" that Ernest had earned through the years, at least until such a time as the new owner made his own reputation known. But does this "goodwill" also bear any potential liabilities?

Shortly after buying Honest Man Coins, a company in Austria figured out a radical new way to authenticate coins using a computerized laser system that would scan the coins and render a rating as to whether the coin was genuine or not. (This system is just as fictional as the buyer, seller, and coin business name in this column.) The new laser authentication system was a big hit, because it could weed out the counterfeit (but full gold-weight) coins that plague U.S. gold coin collectors. (It is a fact that full-weight fake gold coins exist; they were created by the millions in Europe during the early-to-mid twentieth century, not to defraud collectors but because gold coins issued by a nation were worth a premium over gold bullion ingots, when sold to banks. Some experts estimate the problem may affect as many as 10% to 15% of all U.S. gold Double Eagles currently on the market, and that surely most are undetected by the average collector and dealer because the weight, diameter, thickness, color, and gold purity of the coins are all correct.)

Jason P. was a good regular customer of Honest Man Coins. He loved Double Eagles, and tried to buy at least one a month, usually of higher grades and/or better dates. He kept careful records of his purchases and always saved his receipts. When the new laser-scan technology from Austria determined that six of the 43 Double Eagles Jason had bought from Honest Man (when Ernest owned it) were now condemned as fakes, Jason took the coins back to the store, hoping to exchange them for genuine coins of similar grade and date. Robert, the new owner, refused, saying that it wasn't his fault that Ernest sold fakes, and that he shouldn't have to honor a previous owner's lifetime guarantee, and anyway, Ernest was dead.

What do you think? Is Robert bound by the promises made because he also bought the "goodwill" of the company? In other words, he hoped to enjoy Ernest's good reputation, but does he also inherit the problems that might arise? Or is Jason out of luck with his fake double Eagles? The greater question is, should coin dealers and grading services be held accountable if new technology suddenly condemns a goodly percentage of the gold coins once thought genuine? This isn't as much of a theoretical question as you might think; some people think this laser-authentication technology is viable and could emerge any day now. Share your thoughts in the Comments section below, and next week we'll look at some of your responses in the follow-up article.