Goodwill

What is goodwill?

Goodwill (German: Firmenwert) is the amount by which the purchase price of a company exceeds the value of its individual assets less its liabilities. The German Commercial Code (Handelsgesetzbuch, HGB) speaks of the "Geschäfts- oder Firmenwert". It is the part of the purchase price that cannot be assigned to any single item that can be recognised in the balance sheet. Anyone who buys an established bakery pays not only for ovens and shop fittings but also for regular customers, location and reputation; this premium is the goodwill.

In accounting terms, goodwill arises only on the acquisition of a company for consideration. For buyers, it determines how heavily an acquisition weighs on future earnings; for sellers, it matters through the tax consequences for the buyer and thus through the buyer's willingness to pay. It is regulated in the HGB for the annual financial statements under the HGB, in the German Income Tax Act (Einkommensteuergesetz, EStG) for the tax balance sheet and in IFRS (International Financial Reporting Standards).

Origin and economic substance

Arithmetically, goodwill is a residual figure. First, all acquired assets and liabilities are recognised individually at their fair value, that is, at the current market value instead of the previous carrying amount. This also applies to intangible assets that do not appear in the seller's financial statements, such as customer relationships, technology or brands. What remains of the purchase price afterwards is the goodwill. This allocation is called purchase price allocation.

Formula: Goodwill = purchase price - (fair value of the acquired assets - fair value of the acquired liabilities)

Economically, goodwill stands for earnings prospects that are not tied to any single asset: a well-established team, the market position, future customers and the synergies that the buyer expects. In technology companies with few assets on the balance sheet, it often makes up the largest part of the purchase price. If the purchase price is, exceptionally, below the fair value of the net assets, a negative difference arises. In HGB consolidated financial statements it is shown on the liabilities side, and under IFRS it is recognised immediately as income after a renewed review.

Accounting under the HGB

Capitalisation

Under Section 246(1) sentence 4 HGB, goodwill acquired for consideration is deemed to be an asset with a limited useful life. This statutory fiction creates a capitalisation obligation, that is, the obligation to include goodwill in the balance sheet as an asset even though it cannot be sold individually. This is called derivative, that is, acquired, goodwill. Original, self-created goodwill, by contrast, cannot be capitalised. The value that a company builds up over years therefore does not appear in its own balance sheet.

Asset deal and share deal

In the single-entity financial statements, goodwill arises only in an asset deal, in which the acquirer takes over the assets and liabilities individually. In a share deal, it acquires shares and recognises an investment at acquisition cost. Goodwill only becomes visible when the acquired company is included in consolidated financial statements, the joint financial statements of parent and subsidiary companies. There, the purchase price of the investment is offset against the revalued equity of the subsidiary (capital consolidation); a remaining surplus is to be shown as goodwill under Section 301(3) HGB.

Scheduled and unscheduled amortisation

Goodwill is amortised on a scheduled basis over its expected useful life, as a rule in equal annual amounts (straight-line). The useful life has to be estimated and must be capable of justification, for example by the expected duration of customer relationships, the life of the acquired technology or the term of important contracts. If, in exceptional cases, it cannot be estimated reliably, ten years are to be applied under Section 253(3) sentences 3 and 4 HGB. If goodwill is expected to be permanently worth less, for example because the acquired business falls short of expectations, an unscheduled write-down is required. A later reversal is excluded under Section 253(5) sentence 2 HGB, even if the business recovers.

Tax treatment

In the tax balance sheet, a customary useful life of 15 years applies to the goodwill of a commercial business under Section 7(1) sentence 3 EStG. Tax depreciation (Absetzung für Abnutzung, AfA) reduces the acquirer's income taxes over this period. Because the useful life under commercial law can differ from this, the commercial and tax balance sheets often diverge.

Goodwill is tax-depreciable only if the acquirer itself acquires the assets, that is, in an asset deal or on the acquisition of interests in a partnership. If a corporation acquires shares in a GmbH, no depreciable item arises, and impairments of the investment remain disregarded for tax purposes under Section 8b(3) of the German Corporation Tax Act (KStG). This difference shapes the choice of structure: from a tax perspective, buyers often prefer the asset deal and sellers the share deal. In a share deal, their disposal gain is privileged. If a corporation sells, it is 95% tax-exempt under Section 8b KStG; if a private individual with an interest of at least 1% sells, 60% is taxable under the partial income method (Teileinkünfteverfahren).

Goodwill under IFRS

The international accounting standards IFRS are applied mainly by listed groups. Under IFRS 3, the purchase price in the consolidated financial statements is to be allocated to the identifiable assets and liabilities at fair value; customer relationships, technology and order backlog are to be recognised separately. The remaining goodwill is not amortised on a scheduled basis. Instead, under IAS 36 it must be tested for impairment at least annually and additionally where there are indications (impairment test). The test is carried out at the level of cash-generating units, for example a business unit with independent cash flows. An impairment is recognised immediately as an expense and may not be reversed later.

Worked example: calculating and amortising goodwill

An acquirer takes over the business operations of a software company by way of an asset deal for EUR 6.0 million. The purchase price allocation gives the following fair values:

• Office and business equipment including hardware: EUR 0.4 million
• Acquired software and technology: EUR 1.3 million
• Customer relationships: EUR 1.0 million
• Trade receivables: EUR 0.8 million
• Assumed liabilities and provisions, which are deducted: EUR 0.5 million
• Fair value of the net assets: 0.4 plus 1.3 plus 1.0 plus 0.8 minus 0.5 = EUR 3.0 million
• Goodwill: EUR 6.0 million minus EUR 3.0 million = EUR 3.0 million
• Amortisation under commercial law where the useful life cannot be estimated reliably: EUR 3.0 million / 10 = EUR 300,000 a year
• Tax amortisation: EUR 3.0 million / 15 = EUR 200,000 a year; assuming an income tax burden for the acquiring GmbH from corporation tax and trade tax of around 30% (as of 2026), a tax reduction of EUR 60,000 a year
• Tax reduction over 15 years: 15 × EUR 60,000 = EUR 900,000, without discounting and with an unchanged tax burden

The calculated EUR 900,000 is the advantage the acquirer has only in an asset deal; it is discussed in the structure negotiation. For an acquisition in 2026 it turns out somewhat lower, because under the current legislation corporation tax falls in steps from 2028 down to 10% in 2032. In a share deal, by contrast, the acquirer would capitalise the purchase price in its single-entity financial statements as an investment, which is amortised on a scheduled basis neither under commercial law nor for tax purposes.

The allocation of the purchase price is not arbitrary but leaves room for manoeuvre. Suppose the customer relationships are amortised over five years and valued at EUR 1.5 million instead of EUR 1.0 million. Goodwill then falls to EUR 2.5 million. The annual amortisation under commercial law on customer relationships and goodwill rises in the first five years from EUR 200,000 plus EUR 300,000 = EUR 500,000 to EUR 300,000 plus EUR 250,000 = EUR 550,000. The result of the first years is correspondingly lower, and that of the later years higher.

Distinction: goodwill, company value and equity

• Company value: the value of the entire operating business. Goodwill is only the part of the purchase price that exceeds the net assets that can be recognised in the balance sheet.
• Intangible assets: individually identifiable values such as software, customer relationships or brands. They are recognised before goodwill in the purchase price allocation and are often amortised over shorter periods.
• Equity: the difference in the balance sheet between assets and liabilities. Its distance from the purchase price is a first indication of the later goodwill, but not identical to it, because the purchase price allocation works with fair values.
• Control premium: the premium for a majority compared with the value of a minority interest. It is part of the purchase price and is therefore indirectly contained in goodwill.

Common mistakes

• Wanting to recognise one's own goodwill. Self-created goodwill cannot be capitalised, however high its economic value.
• Confusing goodwill with company value. High goodwill in the balance sheet only shows that purchases were made above the net assets in the past, not what the company is worth today.
• Equating the commercial and tax balance sheets. Ten years under the HGB where the useful life cannot be estimated and 15 years under the EStG lead to different results. Deferred taxes can arise from this, that is, future tax charges or relief to be shown in the commercial balance sheet.
• Purchase price allocation only after closing. In an asset deal, the allocation determines the tax depreciation over years. An allocation that is fixed and justified in the contract prevents later discussions with the tax office but does not bind it.
• Overlooking amortisation in the earn-out. If an earn-out is tied to a result after amortisation, the buyer's amortisation of goodwill and acquired assets reduces the payout. Measurement by EBITDA or an express adjustment is therefore common.

Frequently asked questions

How is goodwill calculated?

As the purchase price minus the fair value of the acquired net assets. For this, all assets and liabilities, including intangible assets not previously recognised in the balance sheet, are revalued; what remains of the purchase price is the goodwill.

What is the difference between derivative and original goodwill?

Derivative goodwill is acquired for consideration and must be capitalised; original goodwill is self-created and may be recognised neither under the HGB nor under IFRS. It only becomes visible when an acquirer buys the company and allocates the purchase price in its own balance sheet or in the consolidated financial statements.

Over how many years is goodwill amortised?

Under commercial law, over the expected useful life, and over ten years where this cannot be estimated reliably. For tax purposes, a fixed useful life of 15 years applies. Under IFRS, there is no scheduled amortisation; instead goodwill is tested annually for impairment.

Does goodwill affect EBITDA?

No. Amortisation of goodwill lies below EBITDA but reduces EBIT, that is, earnings before interest and taxes. This is why operating performance after acquisitions is often measured by adjusted EBITDA, while net income and equity bear the amortisation in full.

Does high goodwill reduce the value of a company in a later sale?

Not directly. Buyers value earning power and cash flows, not book values. In due diligence, however, they check whether earlier acquisitions hold their value, because an impending unscheduled write-down points to weaker business areas.

The Roemer Capital view

In a company sale, goodwill is a figure on the buyer's side, but it is not neutral for the negotiation. In an asset deal, the tax amortisation over 15 years gives the acquirer an advantage that a share deal does not offer. We work through both structures early from the perspective of both parties, so that it becomes visible which part of this advantage can be reflected in a higher purchase price.

The purchase price allocation itself and its accounting and tax treatment lie with the parties' auditors and tax advisers. Our contribution is the economic side: we make sure that earn-out definitions and purchase price formulas are worded so that amortisation arising from the acquisition does not unintentionally reduce the payments to the sellers.