Goodwill and Intangible Assets in Financial Due Diligence

Goodwill and intangible assets are often the largest items on the balance sheet of a business that has grown through acquisition or that operates with significant intellectual property. Understanding how they arise, how they are tested, and what risks they carry is an important part of financial due diligence.

How Goodwill Arises

Goodwill is the excess of the consideration paid for an acquisition over the fair value of the net identifiable assets acquired. In accounting terms:

Goodwill = Purchase price − Fair value of net identifiable assets

It represents the premium paid for things that cannot be separately identified and valued: the assembled workforce, brand reputation, customer relationships, market position, and expected synergies.

Under IFRS, goodwill is not amortised but is tested for impairment at least annually. Under US GAAP, the same treatment applies. Under some local GAAPs (including UK FRS 102 for smaller entities), goodwill is still amortised over its useful economic life.

Goodwill in FDD: Key Questions

How Much Is It?

A business with a large goodwill balance has made significant acquisitions in the past. The FDD team will want to understand:

• Which acquisitions created the goodwill
• Whether those acquisitions have performed as expected
• Whether any impairment has been taken, and if not, why not

Impairment Testing

The FDD team will review the most recent goodwill impairment test. This involves a value-in-use calculation based on discounted future cash flows from the cash-generating unit (CGU). Key sensitivities include the discount rate, growth rate, and terminal value assumptions. If the impairment test relies on aggressive assumptions, there is a risk that future impairment charges could flow through the income statement.

Goodwill and EBITDA

Goodwill impairment charges are typically excluded from adjusted EBITDA as non-cash and non-recurring. But a pattern of repeated impairments suggests overpayment for acquisitions — which is a commercial red flag regardless of how it is treated in the EBITDA bridge.

Intangible Assets

Unlike goodwill, intangible assets acquired in a business combination are separately identified and valued at acquisition. Common categories include:

• Customer relationships: The value of the existing customer base, amortised over the expected churn period.
• Brand and trademarks: Capitalised value of brand assets; may be indefinite life (and thus not amortised) or finite.
• Technology and software: Intellectual property, patents, and proprietary platforms.
• Order backlog: Contracted future revenue at the acquisition date.

Internally Generated Intangibles

Internally generated goodwill and brands are not recognised on the balance sheet under IFRS. Only acquired intangibles are capitalised. This creates asymmetry: two otherwise identical businesses may look very different on the balance sheet depending on whether they grew organically or through acquisition.

Amortisation and EBITDA

Intangible amortisation is a non-cash charge that sits below EBITDA (it is usually in "depreciation and amortisation"). However, it represents real economic cost in some cases — particularly where customer relationships or technology need to be continuously invested in to maintain.

FDD teams note the amortisation profile and comment on whether the remaining amortisation represents a future headwind.

Red Flags to Watch For

• Goodwill that has never been impaired despite deteriorating performance
• A large intangible asset portfolio with no corresponding recent investment in the underlying assets
• Capitalised development costs (under IAS 38) that inflate the balance sheet without a clear commercial basis
• Significant goodwill relative to total enterprise value, indicating a largely intangible business with limited hard asset backing

Balance sheet analysis — including goodwill and intangibles — is integrated into FDD work and tested in TS interviews. Our programme covers these themes across 8+ case studies with over 150 EBITDA adjustment examples. Full access for €119.99.