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They're not. That's why purchase price and book value are often different. Goodwill is the difference between the two in order to make the purchaser's books m
by treis 8y ago
They're not. That's why purchase price and book value are often different. Goodwill is the difference between the two in order to make the purchaser's books make sense.
Let's say you're buying a trucking firm. Their only assets are 10 trucks worth a total of one million and they have no liabilities. The book value of that firm is one million. Let's say that the firm is one of the few with the specialized knowledge required to ship radioactive waste. They make quite a bit of money so you buy them for their market value of 10 million.
If we look at your books, it looks like you just spent 10 million for 1 million of assets. In other words, your company just lost 9 million dollars. Obviously that doesn't make sense. The accounting way out of that is to add in 9 million dollars of goodwill. The transaction is then 10 million for 1 million worth of trucks and 9 million worth of goodwill. So now you're paying 10 million for 10 million worth of assets and don't show a loss on your books.
Say a year later due to some safety issues you lose your license to ship radioactive waste. Now the trucking company is just a regular ole trucking company and worth a lot less. So you write down the value of the goodwill so your books reflect reality and use the write down to offset profits to lower your taxes.
- paulddraper 8y agoSo basically every SASS company has basically zero book value?
- treis 8y agoI'm not an accountant so take this with a grain of salt, but no a SAAS company would not have a zero book value. The software powering the company is an asset and should be a quite valuable one. A zero book value company would be something like a consulting firm.
- mbesto 8y agoIIRC, most saas companies will be bought as Stock Purchases and not Asset Purchases, so the math becomes a little easier to do. Difference between the two: https://corporatefinanceinstitute.com/resources/knowledge/deals/asset-purchase-vs-stock-purchase/ https://corporatefinanceinstitute.com/resources/knowledge/de... PS - great explanation of goodwill!
- patio11 8y agoSaaS companies are very asset-light. Take a look at Salesforce, for example: $17.5 billion dollars of assets on the balance sheet... of which ~$6 billion is cash, $7 billion is goodwill, and only about $141 million is capitalized software. (Most of their expenditures to produce software are expensed rather than capitalized.) On the lower end of the scale, liabilities of SaaS companies exceed assets (as measured formally for a balance sheet) quite frequently. The shareholder equity for both of my businesses was negative when I sold them.