when a company decides that it wants to acquire another firm it will first attempt to estimate the real value of the target company for example the enterprise value of macy s using data from its 2017 10 k report is estimated at 11 81 billion after the acquiring company determines the real value of its target it decides how much it is willing to pay on top of the real value so as to present an attractive deal to the target firm especially if there are other firms that are considering an acquisition 
in the example above an acquirer may decide to pay a 20 premium to buy macy s thus the total cost it will propose would be 11 81 billion x 1 2 14 17 billion if this premium offer is accepted then the acquisition premium value will be 14 17 billion 11 81 billion 2 36 billion or in percentage form 20 you also may use a target company s share price to arrive at the acquisition premium for instance if macy s is currently trading at 26 per share and an acquirer is willing to pay 33 per share for the target company s outstanding shares then you may calculate the acquisition premium as 33 26 26 27 however not every company pays a premium for an acquisition intentionally using our price per share example let s assume that there was no premium offer on the table and the agreed upon acquisition cost was 26 per share if the value of the company drops to 16 before the acquisition becomes final the acquirer will find itself paying a premium of 26 16 16 62 5 acquisition premiums in financial accountingin financial accounting the acquisition premium is known as goodwill the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process the acquiring company records goodwill as a separate account on its balance sheet goodwill factors in intangible assets like the value of a target company s brand solid customer base good customer relations healthy employee relations and any patents or proprietary technology acquired from the target company an adverse event such as declining cash flows economic depression increased competitive environment and the like can lead to an impairment of goodwill which occurs when the market value of the target company s intangible assets drops below its acquisition cost any impairment results in a decrease in goodwill on the balance sheet and shows as a loss on the income statement an acquirer can purchase a target company for a discount that is for less than its fair value when this occurs negative goodwill also known as badwill is recognized 