What Is Badwill?

Badwill is also known as negative goodwill, and it occurs when a company purchases an asset at less than net fair market value. Typically, badwill occurs when one company purchases another at a price that is below its book value. This may happen if the outlook for the company is particularly bleak.

Badwill Explained

When one company acquires another company at a value that is greater than the market value of assets and liabilities, it records the excess amount on its balance sheet as "goodwill." Companies with strong brands, for example, are often acquired at a price above the value of the market value of the assets and liabilities because their value as a company lies partly in their brand name and other intangibles that make them attractive to customers. The value in excess of the fair market value is good will. Goodwill is an intangible asset.

Companies may also be acquired at a price that is less than their asset value. Often this occurs when a company is in financial distress. In this case, the acquiring company records on its balance sheet the difference between the fair market value and the price paid as negative goodwill, also known as badwill.

Badwill can also refer to the negative effect felt by a company when investors discover it has done something that is not in accordance with good business practices. Although typically not expressed in a dollar amount, badwill can result in lost revenue, clients, suppliers, and market share and may even prompt legal action.