Goodwill
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Excess of purchase price over the fair value of net identifiable assets in a business combination: Goodwill = Purchase Price - Net ID Assets - Write-Ups + DTL. An indefinite-lived intangible recorded on the acquirer's balance sheet; tested annually for impairment under GAAP rather than amortized.
Goodwill in plain English
When a company buys another business, it often pays more than the plain value of that business's identifiable stuff — its buildings, equipment, patents, and cash minus its debts. That extra amount is called goodwill, and it captures things you can't easily itemize, like a trusted brand, loyal customers, or a talented team. Imagine paying $5 million for a beloved local bakery whose ovens and inventory are only worth $3 million; that $2 million premium is goodwill. It sits on the buyer's books and isn't gradually written off, but each year accountants check whether it's still worth what was paid and mark it down if the business has soured.
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