Negative Goodwill (NGW) Explained: Impact on Australian Businesses in 2025

For years, the term ‘goodwill’ in finance has been associated with the extra value a company pays when acquiring another business – the premium over its net asset value. But in 2025, a different beast is making headlines: negative goodwill (NGW). Unlike its more common counterpart, negative goodwill arises when an acquirer pays less than the fair value of a company’s net assets. This phenomenon is transforming the landscape of mergers and acquisitions (M&A) in Australia, with implications for investors, business owners, and anyone tracking the pulse of the local economy.

What Is Negative Goodwill – and Why Does It Happen?

Negative goodwill occurs when the purchase price of a business is lower than the fair value of its net identifiable assets. In other words, the buyer gets a bargain. This situation typically points to distressed sales, urgent exits, or overlooked value. For example, if Company A acquires Company B for $8 million, but B’s net assets are independently valued at $10 million, the $2 million difference is negative goodwill.

• Distress sales: Sellers facing insolvency or regulatory pressure may accept a lower offer just to exit the market.
• Market inefficiencies: Sometimes, assets are undervalued due to lack of information or poor management.
• Strategic repositioning: Large corporates may offload non-core divisions at a discount to focus on growth sectors.

In 2025, negative goodwill is surfacing in several high-profile Australian transactions, as rising interest rates, global supply chain issues, and industry disruption prompt more distressed or strategic sales.

How NGW Impacts Financial Statements and Investors

Accounting for negative goodwill is governed by AASB 3 (Australian Accounting Standards Board), which aligns closely with international standards. When negative goodwill arises, it is immediately recognised as a gain in profit and loss at the time of acquisition. This can have dramatic effects on reported earnings and market perception.

• One-off profits: The acquirer books an immediate gain, sometimes boosting earnings per share for the acquisition year.
• Investor caution: Seasoned investors know that NGW is not recurring income. They often discount these gains when valuing a company’s future cash flows.
• Tax implications: The Australian Taxation Office (ATO) continues to scrutinise large one-off gains from NGW, especially in cases where valuations are contested.

Take, for example, the 2025 acquisition of a regional manufacturing firm by a Sydney-based conglomerate. The acquisition was completed at a 15% discount to net asset value after the target struggled with energy costs and debt. The buyer booked a one-off profit of $3.5 million, but analysts quickly adjusted forecasts, noting the exceptional nature of the gain.

NGW Trends in 2025: What’s Driving the Surge?

Several factors are driving a spike in negative goodwill transactions in Australia this year:

• Rising interest rates: As the RBA maintains a higher cash rate to curb inflation, many businesses are finding debt burdens unsustainable, leading to distressed sales.
• Restructuring across sectors: Traditional industries like retail and manufacturing are offloading assets to focus on digital transformation or climate adaptation, sometimes at discounts.
• Global supply chain volatility: Ongoing disruptions are pushing some import-dependent firms to exit the market rapidly.
• Regulatory changes: Updates to insolvency laws and government support programs have changed how quickly distressed assets are sold, with less stigma attached to rapid exits.

Notably, the Australian Securities and Investments Commission (ASIC) issued new guidance in February 2025 reminding companies to clearly disclose the nature of NGW gains and provide detailed breakouts in financial reports. This follows a spate of M&A deals where negative goodwill contributed to headline profit numbers, raising concerns about transparency and investor understanding.

Should You Be Worried (or Excited) About Negative Goodwill?

For investors, negative goodwill is a double-edged sword. On one hand, it can signal value buying – a shrewd acquirer picking up assets at a bargain. On the other, it may reflect deeper troubles in the target or sector. Here’s what to watch for:

• Check the context: Is the NGW due to a one-off industry event, or is it part of a broader trend of distress?
• Assess future earnings: Don’t overvalue companies based on NGW-driven profits. Look at underlying cash flows and operating performance.
• Watch for policy updates: With ASIC and the ATO both sharpening their focus, expect more scrutiny of M&A accounting in 2025.

For business owners, negative goodwill can mean faster exits and new capital for transformation – but it’s essential to understand the reputational and financial trade-offs. A well-managed NGW transaction can preserve jobs and support regional economies, while a poorly handled one can erode trust with stakeholders.