The premium paid above the fair value of a company's net assets in an acquisition — recorded on the acquirer's balance sheet as an intangible asset.
Deeper Explanation
Goodwill is the accounting entry that represents what an acquirer believed they were paying for beyond hard assets: brand value, customer relationships, management quality, and future earnings potential. Large goodwill balances on a balance sheet are a warning signal — they represent the gap between what was paid and what was provably worth paying. Goodwill impairment charges (when the acquired business underperforms expectations) are a retroactive admission that the acquisition was overpaid. Buffett distinguishes between "economic goodwill" (the earning power of a brand or franchise, which genuinely increases in value over time) and "accounting goodwill" (a balance sheet relic that may be overvalued).
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