Goodwill
Goodwill is the part of an acquisition price that cannot be attributed to any identifiable asset — the premium a buyer pays for the assembled business, its future customers and the synergies it expects — recorded as an asset on the buyer's balance sheet after the purchase price allocation and tested each year for impairment.
- Also known as
- Acquisition goodwill, Purchased goodwill
- Used at
- the buyer's accounts after completion, as the residual of the purchase price allocation
- Formula
- price paid − fair value of identifiable net assets (including intangibles and deferred tax)
- Typical share of price in a fintech deal
- 30–60%, because most of what is bought is people and expectations
- Tax
- in an asset deal goodwill is often deductible over time; in a share deal it generally is not
How goodwill works in practice
When a buyer pays €50m for a company whose identifiable assets — its contracts, its software, its licence, its brand, less its debts — are worth €30m, the other €20m has bought things accounting cannot list: the team that will still be there next year, the customers who have not signed yet, the cost savings of running two platforms as one, the price of removing a competitor. That €20m is goodwill, and it stays on the balance sheet at cost until the day the business it represents is worth less, when it is written down and the write-down goes through the income statement.
Impairment is the moment goodwill becomes visible. Each year the buyer compares the carrying value of the acquired business with what it is now worth, usually on a discounted cash flow; if the value has fallen below the carrying amount, the difference is charged as a loss. Because goodwill is the residual, it is the first thing impaired — the identifiable assets keep their values — and a large impairment two years after a deal is the market's shorthand for "they overpaid".
In fintech, goodwill is large because the identifiable assets are small: a payments company's value is in its merchants, its people and its growth, and only the first of those becomes an intangible on the allocation. Buyers therefore watch two things: how much of the price will be goodwill (which never amortises and so never reduces reported profit) versus finite-lived intangibles (which do), and whether the earn-out and the synergies that justified the goodwill are tracked well enough to survive the auditor's impairment test.
Example
A bank buys a payments company for €50m. The purchase price allocation identifies €27.5m of net assets — €18m of customer relationships, €7m of technology, €4m of licence and scheme rights, €1m of brand, €3m of tangible net assets, less €5.5m of deferred tax — leaving €22.5m of goodwill. Two years later the company has lost a third of its volume to a competitor; the impairment test values the unit at €38m against a carrying amount of €45m (goodwill plus the unamortised intangibles), and the bank writes €7m off goodwill in its annual results.
Common mistakes
- Treating goodwill as an asset that can be sold: it has no existence apart from the business it came with. - Forgetting that goodwill under IFRS is not amortised, so an acquisition can look accretive until the impairment. - Assuming goodwill is tax-deductible in a share deal. - Booking the whole premium as goodwill to avoid amortisation, which auditors and tax authorities both notice. - Reading an impairment as a cash event: the money left at completion.