Purchase Price Allocation Valuation
Under Accounting Standards Codification 805 (ASC 805), in any merger and acquisition transaction, the acquirer must recognize any assets acquired and liabilities assumed, and any non-controlling interest in the target company at the acquisition date, both of which must be measured at "fair value" as of that date. This exercise of allocating the purchase price is referred to as "Purchase Price Allocation Valuation," or "PPA valuation."
While it seems straightforward on its face, the task is full of challenges. For example, the purchase price may not have been in cash. We routinely see the use of "earn-outs" or other conditional or deferred payments in M&A transactions. The result is that the purchase price may not be certain when the PPA valuation is calculated.
As noted above, technically, the purpose of the PPA is to assess whether material differences between fair value and book value on the balance sheet exist and if so, to revalue the asset or liability to its "fair value," with the goodwill amount as the balancing item. That is, Goodwill is calculated by subtracting the difference between the value of the net assets acquired and the purchase price of the target company.
However, an accurate and reliable estimate of the actual purchase price is a prerequisite to calculating the amount of "goodwill" the acquirer paid in the purchase of the target company. Goodwill is calculated by subtracting the difference between the value of the net assets acquired and the purchase price of the target company.
Beyond fair value adjustments for items actually on the balance sheet, in some scenarios, the target company may also have assets and liabilities on its balance sheet that did not previously meet the criteria for recognition. An example of such an item would be a well-known brand name for the target company's products or services. Brand names are important components to buyers, and they typically would have considered a target's brand name in its purchase price. Accordingly, financial reporting standards will require the valuation and recognition of the brand name on the balance sheet.
Other examples of such items include customer relationships, customer databases, customer contracts, intellectual property such as patents, trademarks, copyrights, trade secrets, etc. These items are typically the most challenging for buyers to evaluate, but they are increasingly a significant portion of the purchase price.
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Valuation of contingent consideration, contingent assets and contingent liabilities.
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Pro forma allocations required for regulatory compliance
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Acquisition-date fair value measurement of the purchase price, previously-held equity interests, and any remaining noncontrolling interests.
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Acquisition-date fair value measurement and economic life analysis of tangible assets, and identifiable intangible assets such as customer relationships, customer databases, customer contracts, intellectual property such as patents, trademarks, copyrights, trade secrets, etc.
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Fair value measurement of contractual liabilities (i.e., deferred revenue) and other liabilities.
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Valuation of options to buy/sell equity interests.
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Valuation of derivatives, complex securities, other financial instruments and their subsequent mark-to-market, if required.
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Pre-transaction analysis
Experienced Valuation Professionals
Eton's experienced team of valuation professionals is at the forefront of purchase price allocation valuation. We have earned our reputation through thorough quantitative and qualitative analysis, and by taking significant care to properly document that rigorous analysis in our valuations. Eton's founders were practicing securities lawyers prior to starting Eton in 2010 and they brought the rigor of that world to Eton, pushing our valuation professionals to stay at the forefront the latest developments in tax case law and other emerging topics. Our experience ranges from both tangible and intangible assets to liabilities and equity interests, with completed reports passing muster with our clients’ auditors, as well as the Securities and Exchange Commission and the IRS.
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