Badwill

Badwill
See also
Price war Unearned revenue Net operating loss Price discrimination Treasury Stock Method Net income Salvage value Price setting Asset valuation

Goodwill is an intangible, non-monetary asset that reflects the excess of the purchase price of a business over the fair market value of its identifiable tangible and intangible assets. Badwill, on the other hand, is the opposite of Goodwill, and is the amount by which the fair market value of a business's assets is less than its purchase price. It is usually created by the seller of a business, when they are unable to sell the business at its fair market value.

Badwill occurs when assets are overvalued due to inefficient management, negative customer sentiment, or bad reputation. It can also be caused by the buyer of a business paying too much for the assets. In accounting, Badwill is recorded as a debit on the balance sheet and is reported as a negative number. It is also written off over a period of time, generally no longer than five years.

In summary, Badwill is an intangible, non-monetary asset that reflects the difference between the purchase price and the fair market value of a business's assets. It is usually caused by either the buyer or the seller of the business overvaluing the assets, and is recorded as a debit on the balance sheet.

Example of Badwill

• Overvalued assets: In some cases, the buyer of a business may pay more for the assets than their fair market value. This is known as overvaluing the assets, and it can lead to the creation of Badwill.
• Negative customer sentiment: If a business has a negative reputation among its customers, this can lead to a decrease in the fair market value of its assets. This can also create Badwill.
• Efficient management: If the management of a business is inefficient, it can lead to a decrease in the fair market value of its assets. This is another example of Badwill.

In summary, there are several examples of Badwill, including overvalued assets, negative customer sentiment, and inefficient management. All of these can lead to a decrease in the fair market value of a business's assets and the creation of Badwill.

When to identify Badwill

• When the seller of a business is unable to sell the business at its fair market value, it is likely that Badwill will be created.
• When assets are overvalued due to inefficient management, negative customer sentiment, or bad reputation, Badwill is likely to be created.
• If a buyer pays too much for the assets of a business, Badwill may be created.

In summary, Badwill is used when a business is sold at an amount higher than its fair market value, or when assets are overvalued due to inefficient management, negative customer sentiment, or bad reputation. It may also be created when a buyer pays too much for a business's assets.

Types of Badwill

• Price Overpayment Badwill: This type of Badwill is created when the buyer of a business pays more than the fair market value of its assets. This can happen when a buyer is desperate to acquire a business or has a lack of understanding of the assets they are acquiring.
• Poor Management Badwill: This type of Badwill is created when the assets of a business are not properly managed, resulting in a lower fair market value than the purchase price. This can occur due to inefficient management practices, inadequate budgeting, or poor customer service.
• Negative Sentiment Badwill: This type of Badwill is created when a business has a negative reputation or is associated with bad publicity. This can result in lower demand for the business's products and services, resulting in a lower fair market value than the purchase price.

Steps of managing Badwill

• Step 1: Determine the fair market value of the business’s assets. This should include all tangible and intangible assets, such as land, buildings, equipment, patents, customer relationships, and brand names.
• Step 2: Determine the purchase price of the business. This is the amount paid or negotiated to acquire the business.
• Step 3: Subtract the fair market value of the assets from the purchase price. If the result is a negative number, this is the amount of Badwill.
• Step 4: Record the Badwill amount as a debit on the balance sheet and write off the amount over a period of time, generally no longer than five years.

Advantages of Badwill

• Badwill can help a company to enter into a new market with an existing customer base, brand recognition, and other intangible assets. This can provide the company with an advantage over competitors who are starting from scratch.
• Badwill can also be used as a tax shield. Companies can write off the Badwill against their taxable income, reducing the amount of taxes they owe.
• If a company acquires a business and the fair market value of the acquired business is lower than the purchase price, the company can record the difference as Badwill. This can help the company to increase its reported profits, enhancing its financial performance.

Limitations of Badwill

• Inefficiencies in Management - If management is inefficient and unable to properly manage the business, its assets may be overvalued and result in Badwill.
• Negative Customer Sentiment - If customers have a negative opinion of the business, its assets may be overvalued and result in Badwill.
• Bad Reputation - If the business has a bad reputation, its assets may be overvalued and result in Badwill.
• Buyer Overpaying - If the buyer of a business pays too much for the assets, Badwill may result.

Other approaches related to Badwill

• Acquisition Method: Under this method, the cost of an acquired business is allocated between the identifiable tangible and intangible assets, and any excess cost is attributed to Goodwill.
• Impairment Test: This test is conducted to assess whether the value of an acquired asset has declined since the time of acquisition. If it has, any excess cost is attributed to Badwill.
• Revaluation Model: This model involves the revaluation of all of the assets of the acquired business. If the fair market value of the assets is lower than the purchase price, the difference is attributed to Badwill.

In summary, there are three approaches to allocating the cost of an acquired business, which can result in a Goodwill or Badwill value. These are the Acquisition Method, Impairment Test, and Revaluation Model. Depending on the approach used, the cost of the acquired business is allocated between the identifiable tangible and intangible assets and any excess cost is attributed to either Goodwill or Badwill.

Suggested literature

• Elmuti, D., & Davis, H. H. (2006). Not worth the bad will. Industrial Management, 48(6).
• Rosas, A., Bermúdez, J. P., & Gutiérrez, A. (2018). Is a bad will a weak will? Cognitive dispositions modulate folk attributions of weakness of will. Philosophical Explorations, 21(3), 350-363.
• Mason, E. (2015). Moral ignorance and blameworthiness. Philosophical Studies, 172(11), 3037-3057.