Goodwill

Goodwill is the amount paid above net asset value when acquiring a company. Buy a business with 10 million in assets for 15 million and the 5 million difference is recorded as goodwill.

The premium reflects value that does not appear on a balance sheet — brand, customer relationships, technology, people. Goodwill is where that intangible value is placed.

The difficulty is that the figure depends on the acquirer's judgement. Overpaying in a bidding contest or overestimating synergies simply produces a larger goodwill balance.

If the acquired business underperforms, goodwill must be impaired — written down in the accounts, producing a large loss all at once. No cash leaves, but net profit collapses.

So a company whose assets are unusually weighted toward goodwill deserves scrutiny. Serial acquirers carry the largest balances and the greatest exposure to future write-downs.