Goodwill is something you add to the value of a company to sweeten the pot during acquisitions but it should never be the primary value proposition.
What? Goodwill is an accounting name for the excess paid to acquire a company beyond the fair market value of its assets. It's a "stub", basically used so that the books balance in terms of debits and credits (i.e. you paid X cash for the company, and that value splits between FMV of its assets and the rest is "goodwill".) Nobody ever says "I'm going to add some goodwill to sweeten the pot" when buying a company, nor would anyone attempt to use it for determining purchase price.
Are you referring to "Modern Meaning"? Maybe I'm not understanding what you're saying. It seems like you're implying that "goodwill" is a material part of the calculation of a purchase price prior to the deal being signed.
That is indeed what I am saying...what good will (no pun intended:) ) it be post-deal signing?...if you read that section "Modern Meaning" you see it alludes to brand,customers and IP...in the case of zero-revenue startups that translates to hype,users and maybe an iPhone app.
The gp is using the strict accounting definition of goodwill, you use it in its popular meaning. Strictly speaking nobody values goodwill before a deal, but it's often used as a word for 'the soft stuff we find hard to quantify'.
Maybe... but nobody really thinks of it that way, any more than they bother to worry about what fair market value of the assets (the other part of the purchase price) is for an early-stage tech company. They just care about the overall price, and they leave splitting that into FMV and goodwill as an exercise for the accountants after the deal is done.
Comments
What? Goodwill is an accounting name for the excess paid to acquire a company beyond the fair market value of its assets. It's a "stub", basically used so that the books balance in terms of debits and credits (i.e. you paid X cash for the company, and that value splits between FMV of its assets and the rest is "goodwill".) Nobody ever says "I'm going to add some goodwill to sweeten the pot" when buying a company, nor would anyone attempt to use it for determining purchase price.
http://en.wikipedia.org/wiki/Goodwill_(accounting)
Also, the parent post refers to "flipping" but that generally means quickly reselling something, not killing it after three years.
From that same article, if you read the third paragraph, you'll see what I am saying.
Are you referring to "Modern Meaning"? Maybe I'm not understanding what you're saying. It seems like you're implying that "goodwill" is a material part of the calculation of a purchase price prior to the deal being signed.
That is indeed what I am saying...what good will (no pun intended:) ) it be post-deal signing?...if you read that section "Modern Meaning" you see it alludes to brand,customers and IP...in the case of zero-revenue startups that translates to hype,users and maybe an iPhone app.
The gp is using the strict accounting definition of goodwill, you use it in its popular meaning. Strictly speaking nobody values goodwill before a deal, but it's often used as a word for 'the soft stuff we find hard to quantify'.
Maybe... but nobody really thinks of it that way, any more than they bother to worry about what fair market value of the assets (the other part of the purchase price) is for an early-stage tech company. They just care about the overall price, and they leave splitting that into FMV and goodwill as an exercise for the accountants after the deal is done.