Goodwill in Finance: What It Is, How It Works, Example

By Frank Bass – Updated Jun 7, 2025 at 12:19 AM | Fact-checked by Robin Hartill, CFP

Key Points

Goodwill is an accounting term for the premium paid over fair market value in a business acquisition.
Goodwill is an intangible asset that represents the value of things like brand reputation and customer loyalty.
Investors should consider the amount of goodwill on the balance sheet, considering that goodwill can be difficult to value.

Businesses will often pay a premium to acquire another company, handing over more money than the company being purchased is worth. Why pay more than the fair market value? In a word, goodwill.

We’ll explain how goodwill is defined, how it’s handled on a company’s financial statements, and outline the pros and cons of goodwill for investors. We'll also provide examples of how goodwill has affected recent business transactions.

A magnifying glass being held over a balance sheet. — Image source: Getty Images.

What is goodwill?

Goodwill is an intangible asset that represents the value of a brand, its reputation, patents, specialized workforce, customer service, or possible synergies from the acquisition.

When one company acquires another, it might pay more than the fair market value of the company being acquired. The reason often is that the acquiring company can add goodwill as an asset.

Calculating goodwill is generally a straightforward exercise. You can calculate goodwill as follows:

Company's purchase price - fair market value of assets and liabilities = Goodwill acquired.
For example, suppose Company A pays $1 million for Company B, which has $750,000 in cash holdings, inventory, accounts receivable, and assets. The amount of goodwill acquired by the purchase of Company B is $250,000.

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About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Frank Bass has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Walt Disney. The Motley Fool recommends Alstom and GE Aerospace and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.