The write-down of existing goodwill on the balance sheet increases the excess purchase price. Sometimes, a % of the excess purchase price can be allocated to a PP&E and / or intangible asset write-up. In this scenario, it would be important to write-down existing goodwill since it would impact the amount of the write-up.
Excess purchase price = equity purchase price + transaction fees – seller’s shareholder’s equity + write-down of existing goodwill
By writing down existing goodwill, we are looking at the LBO on a “clean slate” and analyzing only the premium paid on the original assets, without the noise of other past acquisitions made by the seller.
Existing goodwill represents the premium that the seller had previously paid to acquire other companies, and so we write this existing goodwill down to find the “true” excess purchase price over the original book value of the assets. Since we are comparing the purchase price to the original book value of the acquired assets – which would be lower without the existing goodwill – the write-down of existing goodwill increases excess purchase price.
The write-down of existing goodwill will not make an impact on the ending balance sheet values if we are not allocating a % of the excess purchase price to asset write-ups, as goodwill just ends up being the plug to make the balance sheet balance.