Why does goodwill get created on target's balance sheet?
Looking at a few 3 statement practice LBOs and struggling to understand the logic behind the Purchase Price Allocation.
My understanding of Goodwill is that it is an intangible asset created when an acquiring company pays a price above the target's net asset value. Why then in a 3 statement LBO does Goodwill get created on the Seller's balance sheet? The target company itself has acquired nothing here.
Thanks in advance for anyone who can explain the logic here.
Things like brand value, employee know-how, etc are all assets that the company paid for, but are hard to assign a dollar value to.
For example, Amazon acquired Whole Foods for $13bn - only $3bn of that was physical assets (stores, inventory, etc). The other $10bn was goodwill - brand name, customer loyalty, future growth. That is extremely valuable and goodwill is an attempt to quantify that.
Also, don't forget the simple A = L+E. In the above example, if I paid $13bn in either debt/equity but physical assets are only worth $3bn, I have to have another $10bn somewhere in assets - thus goodwill
Thanks yeah I get that, but why does it get created on the Target's balance sheet in an LBO model? I can't find a good answer anywhere
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