Goodwill in M&A: The Hidden Asset That Impacts Deal Value
How different buyers evaluate goodwill and why it matters in negotiations
In the intricate world of mergers and acquisitions (M&A), one factor often carries significant weight yet remains misunderstood: goodwill. A substantial portion of deal value can be attributed to goodwill, reflecting the premium paid over the fair market value of a company’s net assets. However, goodwill is not just a “soft” accounting concept—it directly influences deal structuring, post-acquisition performance, and even how different types of buyers assess ROI.
For small and medium-sized enterprise (SME) owners, understanding goodwill is not just a theoretical exercise—it’s a critical factor that can make or break an acquisition deal, particularly when negotiating with buyers from different regions.
What is Goodwill?
Goodwill arises when an acquirer pays more for a target company than the fair value of its net identifiable assets. This premium often accounts for intangible value drivers such as:
✅ Brand reputation
✅ Customer loyalty & relationships
✅ Intellectual property & proprietary know-how
✅ A skilled and experienced workforce
Unlike physical assets, goodwill is an intangible asset recorded on the balance sheet during an acquisition. However, different buyers perceive and treat goodwill very differently—and this can significantly impact how a deal is negotiated and structured.
Calculating Goodwill: A Simple Formula
The standard calculation is:
📌 Goodwill = Purchase Price – Fair Value of Net Identifiable Assets
Example: If Company A acquires Company B for $1 million, but the fair value of Company B’s net assets is $800,000, the goodwill recorded would be $200,000. This represents the intangible value the buyer is willing to pay for, beyond tangible assets.
However, what many sellers fail to anticipate is how different buyers account for goodwill—especially in cross-border deals.
How Different Buyers Approach Goodwill in M&A
1. Japanese Buyers vs. Singaporean Buyers: The Impact of Amortization Rules
One of the biggest surprises for SME owners comes when Japanese buyers evaluate goodwill. Unlike Singapore or most Western accounting standards, Japanese accounting rules require goodwill to be amortized over time.
🔹 Why does this matter?
Because amortizing goodwill reduces reported earnings every year, it affects how Japanese buyers calculate ROI on an acquisition. This often makes them more cautious about overpaying for goodwill, as it directly eats into their future profits.
🔹 Contrast with Singaporean Buyers
In Singapore (and under IFRS), goodwill is not amortized but instead subject to annual impairment testing—meaning that it is only written down if its value declines significantly. This allows for more flexibility in valuation and often leads to a higher tolerance for goodwill in a deal.
🔹 Implication for Sellers:
If you’re selling your business to a Japanese buyer, expect them to:
✅ SCRUTINIZE GOODWILL MORE INTENSELY during negotiations
✅ PUSH FOR A LOWER GOODWILL COMPONENT in the purchase price
✅ SEEK STRUCTURED PAYMENT OPTIONS to mitigate the impact of amortization
Pro Tip
If you’re engaging a Japanese buyer, be ready to justify goodwill in terms of measurable future benefits, rather than just general brand strength or reputation.
2. The Common Misconception About Goodwill in M&A
One major misconception SME owners have is that goodwill is simply “extra value” that buyers willingly pay. In reality, buyers often push back hard against high goodwill valuations.
❌ MISCONCEPTION: “If my business is profitable and has strong customer relationships, buyers should automatically pay a high premium.”
✅ REALITY: Buyers evaluate goodwill based on risk-adjusted future returns. If they believe customer loyalty is tied to a single founder, or that market conditions might change, they will discount goodwill heavily in negotiations.
Goodwill and Post-Deal Performance: What Sellers Must Know
Goodwill doesn’t just affect deal negotiations—it has serious implications post-acquisition as well.
Goodwill Impairment Risks
- After an acquisition, goodwill must be tested for impairment annually.
- If business performance declines, goodwill may need to be written down, affecting financial statements.
- Large goodwill impairments can lead to reduced investor confidence, stock price declines, or even disputes between buyers and sellers.
Real-World Example
In some M&A deals, buyers have overestimated goodwill, leading to massive impairment losses post-acquisition. This is why buyers—especially financial investors—demand concrete justifications for goodwill valuations.