Explain the complete formula for how to calculate Goodwill in an M&A deal.

Goodwill = Equity Purchase Price – Seller Book Value + Seller’s Existing Goodwill – Asset Write-Ups – Seller’s Existing Deferred Tax Liability + Write-Down of Seller’s Existing Deferred Tax Asset + Newly Created Deferred Tax Liability

A couple notes here:

• Seller Book Value is just the Shareholders’ Equity number.

 You add the Seller’s Existing Goodwill because it gets written down to $0 in an M&A deal.

• You subtract the Asset Write-Ups because these are additions to the Assets side of the Balance Sheet – Goodwill is also an asset, so effectively you need less Goodwill to “plug the hole.”

• Normally you assume 100% of the Seller’s existing DTL is written down.

• The seller’s existing DTA may or may not be written down completely (see the next question).