Goodwill typically arises during business acquisition. When one company buys another company, it may pay more money than the target company’s book value for certain intangible assets, including brand name, customer base, and patents. These assets are known as goodwill.
The value of goodwill is subjective. For example, a company that owns the patent of a unique technology that customers really like may have a lot of goodwill. A company that owns hundreds of patents of technologies that people no longer use may have negative goodwill if these technologies are valued at less than their book value. If a company overvalues the goodwill of a target company during an acquisition, it runs into the risk of overpaying for it.
