# Goodwill

## Quick Definition
An intangible asset representing the excess paid to acquire a business over the fair value of its identifiable assets.

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## What is Goodwill?
When you acquire a company, goodwill is the difference between what you paid and the fair value of the tangible assets you received. It represents intangible value like brand reputation, customer loyalty, and employee expertise.

## Why Goodwill Matters
If you acquire a competitor for $2M but their identifiable assets (equipment, cash, receivables minus liabilities) are only worth $1.2M, the $800K difference is goodwill. You paid for something real even if you cannot touch it.

For founders considering acquisitions, understanding goodwill helps evaluate whether a purchase price is reasonable. High goodwill means you are paying mostly for intangibles, which carries more risk.

## Goodwill Impairment
Unlike other intangibles, goodwill is not amortized. Instead, it is tested annually for impairment. If the acquired business underperforms, you may need to write down goodwill, creating a large expense hit.

### Formula
Goodwill = Purchase Price - Fair Value of Net Identifiable Assets

### Example
Your SaaS company acquires a smaller competitor:
- Purchase Price: $1,500,000
- Fair Value of Assets: $600,000
- Fair Value of Liabilities: $200,000
- Net Identifiable Assets: $400,000

Goodwill = $1,500,000 - $400,000 = $1,100,000

You paid $1.1M for intangible value: their brand, customer relationships, and team.