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Let's say you own a car yard. You have a chunk of land, a building, and some stock. Those might go on the books as simple assets of ten million bucks. You deci

Let's say you own a car yard. You have a chunk of land, a building, and some stock. Those might go on the books as simple assets of ten million bucks. You decide to sell the business. You want to retire, you entertain offers. The winning offer is fifteen million dollars. The purchaser now has something they paid $15m for. The actual assets are only $10m. How you you account for that in double-ledger accounting? You put $5m down to goodwill. That's the grossly simplified version. It's the difference between tangible, obvious assets (cash, property, stock, etc), and the intangibles that a buyer might pay a premium for. At heart it's a reasonable enough convention. You can do all sorts of too-clever-for-our-own-good stuff with it but you know what, that's true of basically every accounting construct.

JohnFen 3y ago
That's similar to the other explanations. > The purchaser now has something they paid $15m for. The actual assets are only $10m. How you you account for that in double-ledger accounting? You put $5m down to goodwill. This is the part I don't understand that makes it all seem shady. Surely, that $5M is a loss for the purchaser, and profit for the seller, no? Why the weird "goodwill" accounting?
- beckingz 3y ago
  It doesn't count as a loss until you official say "this is actually a loss (impairment/write down)". Because why would you buy a business for more than it is worth?
  - 0xbadcafebee 3y ago
    So, again, paying more for something than it's worth - isn't the extra literally wasted money? You can justify the cost however you want, tell yourself any story of why you paid over its value. But the extra money you paid is capital that could have been used for something else of similar value, and did not necessarily need to be paid. That's effectively "giving away" money. I suppose "giving away money" can be a form of "good will", when the purpose is specifically charity. But when the purpose isn't charity... it's throwing money away. To be clear, we're talking about money spent over the value of the product/service. Value is obviously kind of an amorphous thing, in that depending on various market forces the value of a single thing can swing wildly. But assuming there is a known market value, and a purchaser chooses to pay over that market value, that should - in financial terms - be considered a waste, shouldn't it? If the government knew a contractor would take $50M for a contract, and paid them $100M anyway, just for the hell of it, that would be a waste, not goodwill. I think to call it "goodwill" should imply charity, and thus be required to conform to the same rules and regulations of any charitable donation. Otherwise we should call it waste. This should make it clearer exactly what's being purchased and why. Shareholders might perk up their ears if they hear the company they invest in just wasted $50M.
    - ffgjgf1 3y ago
      You fundamentally misunderstand what goodwill represents. e.g. we can agree that most software companies are worth more than the total value of the chairs, desks and laptops they own? Most of that value is intangible (know-how, employees, products themselves) after an acquisition this becomes goodwill. Obviously these things are notoriously hard to value but that does not mean that they are totally worthless as you keep implying for some reason… Evaluating most businesses which spend a lot on R&D is hard, estimating future growth is hard to. Look at public companies, majority of the market cap of all(?) tech companies is made up of goodwill rather than backed by tangible assets e.g. look at Apple it’s worth 46x it’s book value if someone somehow hypothetically acquired Apple at it’s current market price (it’s and oversimplification but more or less accurate) ~97% of what they paid for would be accounted as goodwill
  - JohnFen 3y ago
    Ok, I just have to resign myself to the fact that none of the explanations here make any sense to me whatsoever. It all sounds extremely shady. I guess this is why I didn't go into finance as a career.
    - phil21 3y ago
      I have a one man SaaS that nets me $100k/yr in revenue. It's button-click simple to setup and requires zero maintenance aside from collecting the money each month. The net assets are basically $15,000 worth of IT gear like a laptop and some servers. There is current month to month contracted revenue spread across a diverse base of users paying $5-100/mo each. How much would you offer me for this company? How much would you take for this company if you currently owned it? Something is worth what someone else is willing to pay for it. Obviously whatever the company sells for is worth exactly that amount at that moment in time. Valuing such a business at $15k would be absurd, just as valuing it at $15m would be. Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot. If you then turn around and sell the same company later for a loss, you take a write down on that goodwill. Certainly not perfect, but there aren't too many other ways you can express the present value of a company other than what it sells for.
      - JohnFen 3y ago
        > have a one man SaaS that nets me $100k/yr in revenue. That 100k/yr, though, is tangible and pricing it is straightforward. That's a very different situation that doesn't require making numbers up. > Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot. The name absolutely doesn't help, but I don't think that's what I'm hung up on. I'm hung up on the idea of making up a monetary figure out of whole cloth and pretending it's real in some way. This disconnect confuses me greatly, and the only way I can make it make sense in my head is in the sense of "creative accounting". Which just explains why I didn't choose a career in finance, and highlights why I view the financial world generally with tremendous skepticism.
        3y ago
- ffgjgf1 3y ago
  > Surely, that $5M is a loss for the purchaser, and profit for the seller, no? You don’t know that. In theory a company pay a premium because of future growth expectations. I don’t think land is a good example though because it’s relatively easier to value. If you look at publicly traded companies most have a market cap higher or way higher than their book value (tangible/“real” assets). If another company ends up acquiring a public company that difference will simply be accounted as “goodwill” on their balance sheet
  - deleted 3y ago
    [deleted]
  - JohnFen 3y ago
    > You don’t know that. Sure I do. It's right there in the basic math. > In theory a company pay a premium because of future growth expectations. Yes, but until that growth happens, it doesn't exist. So it doesn't change the fact that, at the time of the sale, a loss was incurred. To treat the expectations of future growth as a current asset is what seems shady to me. It's just making things up.
    - ffgjgf1 3y ago
      So imagine you buy some stock from of a public company for $100. It’s book value is $5. Do you get to immediately record a loss? What sense would it make? This is the same. > current asset is what seems shady to me Why? How? Do you believe all the things you don’t understand are somehow shady? Goodwill depreciates over time so you just incur the same loss just spread out over multiple years. > at the time of the sale, a loss was incurred. An asset is worth what a purchaser is willing to pay for it. There is no loss incurred until you sell it.

JohnFen 3y ago

That's similar to the other explanations. > The purchaser now has something they paid $15m for. The actual assets are only $10m. How you you account for that in double-ledger accounting? You put $5m down to goodwill. This is the part I don't understand that makes it all seem shady. Surely, that $5M is a loss for the purchaser, and profit for the seller, no? Why the weird "goodwill" accounting?

beckingz 3y ago
It doesn't count as a loss until you official say "this is actually a loss (impairment/write down)". Because why would you buy a business for more than it is worth?
- 0xbadcafebee 3y ago
  So, again, paying more for something than it's worth - isn't the extra literally wasted money? You can justify the cost however you want, tell yourself any story of why you paid over its value. But the extra money you paid is capital that could have been used for something else of similar value, and did not necessarily need to be paid. That's effectively "giving away" money. I suppose "giving away money" can be a form of "good will", when the purpose is specifically charity. But when the purpose isn't charity... it's throwing money away. To be clear, we're talking about money spent over the value of the product/service. Value is obviously kind of an amorphous thing, in that depending on various market forces the value of a single thing can swing wildly. But assuming there is a known market value, and a purchaser chooses to pay over that market value, that should - in financial terms - be considered a waste, shouldn't it? If the government knew a contractor would take $50M for a contract, and paid them $100M anyway, just for the hell of it, that would be a waste, not goodwill. I think to call it "goodwill" should imply charity, and thus be required to conform to the same rules and regulations of any charitable donation. Otherwise we should call it waste. This should make it clearer exactly what's being purchased and why. Shareholders might perk up their ears if they hear the company they invest in just wasted $50M.
  - ffgjgf1 3y ago
    You fundamentally misunderstand what goodwill represents. e.g. we can agree that most software companies are worth more than the total value of the chairs, desks and laptops they own? Most of that value is intangible (know-how, employees, products themselves) after an acquisition this becomes goodwill. Obviously these things are notoriously hard to value but that does not mean that they are totally worthless as you keep implying for some reason… Evaluating most businesses which spend a lot on R&D is hard, estimating future growth is hard to. Look at public companies, majority of the market cap of all(?) tech companies is made up of goodwill rather than backed by tangible assets e.g. look at Apple it’s worth 46x it’s book value if someone somehow hypothetically acquired Apple at it’s current market price (it’s and oversimplification but more or less accurate) ~97% of what they paid for would be accounted as goodwill
- JohnFen 3y ago
  Ok, I just have to resign myself to the fact that none of the explanations here make any sense to me whatsoever. It all sounds extremely shady. I guess this is why I didn't go into finance as a career.
  - phil21 3y ago
    I have a one man SaaS that nets me $100k/yr in revenue. It's button-click simple to setup and requires zero maintenance aside from collecting the money each month. The net assets are basically $15,000 worth of IT gear like a laptop and some servers. There is current month to month contracted revenue spread across a diverse base of users paying $5-100/mo each. How much would you offer me for this company? How much would you take for this company if you currently owned it? Something is worth what someone else is willing to pay for it. Obviously whatever the company sells for is worth exactly that amount at that moment in time. Valuing such a business at $15k would be absurd, just as valuing it at $15m would be. Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot. If you then turn around and sell the same company later for a loss, you take a write down on that goodwill. Certainly not perfect, but there aren't too many other ways you can express the present value of a company other than what it sells for.
    - JohnFen 3y ago
      > have a one man SaaS that nets me $100k/yr in revenue. That 100k/yr, though, is tangible and pricing it is straightforward. That's a very different situation that doesn't require making numbers up. > Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot. The name absolutely doesn't help, but I don't think that's what I'm hung up on. I'm hung up on the idea of making up a monetary figure out of whole cloth and pretending it's real in some way. This disconnect confuses me greatly, and the only way I can make it make sense in my head is in the sense of "creative accounting". Which just explains why I didn't choose a career in finance, and highlights why I view the financial world generally with tremendous skepticism.
      - 3y ago
ffgjgf1 3y ago
> Surely, that $5M is a loss for the purchaser, and profit for the seller, no? You don’t know that. In theory a company pay a premium because of future growth expectations. I don’t think land is a good example though because it’s relatively easier to value. If you look at publicly traded companies most have a market cap higher or way higher than their book value (tangible/“real” assets). If another company ends up acquiring a public company that difference will simply be accounted as “goodwill” on their balance sheet
- deleted 3y ago
  [deleted]
- JohnFen 3y ago
  > You don’t know that. Sure I do. It's right there in the basic math. > In theory a company pay a premium because of future growth expectations. Yes, but until that growth happens, it doesn't exist. So it doesn't change the fact that, at the time of the sale, a loss was incurred. To treat the expectations of future growth as a current asset is what seems shady to me. It's just making things up.
  - ffgjgf1 3y ago
    So imagine you buy some stock from of a public company for $100. It’s book value is $5. Do you get to immediately record a loss? What sense would it make? This is the same. > current asset is what seems shady to me Why? How? Do you believe all the things you don’t understand are somehow shady? Goodwill depreciates over time so you just incur the same loss just spread out over multiple years. > at the time of the sale, a loss was incurred. An asset is worth what a purchaser is willing to pay for it. There is no loss incurred until you sell it.