Ok, I just have to resign myself to the fact that none of the explanations here make any sense to me whatsoever. It all sounds extremely shady. I guess this is why I didn't go into finance as a career.
The net assets are basically $15,000 worth of IT gear like a laptop and some servers. There is current month to month contracted revenue spread across a diverse base of users paying $5-100/mo each.
How much would you offer me for this company? How much would you take for this company if you currently owned it?
Something is worth what someone else is willing to pay for it. Obviously whatever the company sells for is worth exactly that amount at that moment in time. Valuing such a business at $15k would be absurd, just as valuing it at $15m would be.
Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot.
If you then turn around and sell the same company later for a loss, you take a write down on that goodwill.
Certainly not perfect, but there aren't too many other ways you can express the present value of a company other than what it sells for.
That 100k/yr, though, is tangible and pricing it is straightforward. That's a very different situation that doesn't require making numbers up.
> Thus, the difference in asset value vs. what you paid is just called "goodwill" - perhaps the name hangs people up a lot.
The name absolutely doesn't help, but I don't think that's what I'm hung up on. I'm hung up on the idea of making up a monetary figure out of whole cloth and pretending it's real in some way.
This disconnect confuses me greatly, and the only way I can make it make sense in my head is in the sense of "creative accounting". Which just explains why I didn't choose a career in finance, and highlights why I view the financial world generally with tremendous skepticism.
You can absolutely assign a value to that stream. That's how you arrived at the purchase price in the first place! But that income hasn't been realized yet and it's not written in stone. The income could be higher or lower depending on what happens in the future.
I will say that while I don't think goodwill is sus in and of itself, your intuition that people doing things with the goodwill value can be sus. If I buy a company with $10m in assets and $5m in goodwill, and a year later announce I'm writing down the goodwill to $1m, something is definitely up! I may have mis-managed the company into the ground. It may be that the premium I paid was based on fraudulent assessment of the intangibles (e.g. a bunch of future sales that never existed), things like that.
I said in an earlier comment that I didn't think I was getting hung up on the name, but I had a thought that hints that maybe I am.
If it were called "slop" instead of "goodwill", I think I would be less bothered by it. don't get me wrong, it would still bother me -- and I wouldn't understand it any better -- but it would feel less like a term someone would use when trying to pull a fast one.
> It's just that accounting wants both sides of the ledger to balance
Yeah, you and a couple of other people keep saying that, but I don't really understand what that means. I mean, I know what having both sides of the ledger balance means, but this sort of example seems bizarre and extremely suspect to me. It just looks for all the world like people making stuff up.
That's OK. I can't understand everything, and this isn't something that's actually important for me to understand.
Before the purchase, I had some pile of assets worth $A. After the purchase, I still have some pile of assets worth $A. The purchase balances.