Goodwill, in business terms, is the 'intangible value' that a company gains when it acquires another business for a price higher than the fair market value of its net assets. It represents the extra price paid for the acquired company's brand reputation, customer relations, technology, or other intangible assets.
Goodwill is an intangible asset that arises when a company is bought for more than the fair market value of its net tangible and intangible assets. The premium paid is often attributed to the company's strong brand, proprietary technology, customer base, good employee relations, and other factors that can't be physically measured but contribute to earning potential.
Goodwill is recorded on the balance sheet of the acquiring company under its assets section. However, unlike other assets, goodwill is not amortized but is periodically tested for impairment, which can lead to adjustments in its value.
It's essential to understand that goodwill is subjective and can be overstated or understated, depending on the price paid for the acquisition. Hence, investors should consider it while evaluating a company's financial health but not rely solely on it.
When Google bought YouTube for $1.65 billion in 2006, the actual tangible assets were worth far less. The substantial amount of goodwill from this purchase reflected YouTube's immense popularity, user base, and market potential.
Coca-Cola's goodwill primarily arises from its acquisitions of various beverage brands worldwide. The premium paid over the fair value of these companies' net assets is attributed to their brand reputation and customer loyalty.
When Amazon acquired Whole Foods for $13.7 billion in 2017, it paid more than the fair market value of Whole Foods' net assets. The goodwill from this deal reflected Whole Foods' strong brand reputation, established customer base, and strategic value to Amazon's retail expansion.