When a company completes an acquisition, U.S. GAAP requires the buyer to record what it bought at fair value. A purchase price allocation valuation supports that process. It uses accepted valuation methods to determine values for the assets and liabilities. An auditor then reviews the purchase price allocation valuation report to check that the methods, assumptions, and conclusions are reasonable. The final allocation also affects the opening balance sheet and future amortization expense. Below, we outline what the report contains, how an analyst prepares it, and what to look for when reviewing it.
Peak Business Valuation is a professional appraisal firm. Our analysts can determine the fair value of the assets and goodwill acquired in a business deal. If you have any questions about how we can assist with a purchase price allocation, schedule a free consultation below to get started.
What Is a Purchase Price Allocation Valuation Report?
A purchase price allocation valuation report shows how a business spreads its purchase price among the acquired assets and liabilities. Under ASC 805, the buyer measures each item at fair value on the closing date. Any amount left over becomes goodwill. This rule applies whenever a company gains control of a business.
Companies have up to one year after acquisition to finalize the allocation. However, auditors often expect this report well before the first annual audit. A complete report generally covers the following:
- Purchase Consideration: The analyst totals the cash, stock, assumed debt, and contingent payments in the deal.
- Tangible Assets: The analyst measures property, equipment, and inventory at fair value rather than book value.
- Identifiable Intangible Assets: The analyst values customer relationships, non-competes, and other intangible assets on their own.
- Assumed Liabilities: The analyst recognizes debt, contracts, deferred revenue, and contingent liabilities as of the acquisition date.
- Goodwill: The analyst records any leftover amount as goodwill after valuing the assets and liabilities.
For more information, see Understanding a Purchase Price Allocation Report.
How Is a Purchase Price Allocation Valuation Report Prepared?
Valuation analysts follow a structured process when preparing the allocation. Below, we outline the five steps behind a purchase price allocation valuation report.
Determine the Purchase Consideration
The purchase consideration is the starting figure for the allocation. An analyst reads the purchase agreement and the closing statement. From there, they total the cash paid, any equity issued, debt assumed, and working capital true-ups. Earnouts and other contingent payments are measured at fair value on the closing date. As such, the total often differs from the headline price in the deal announcement.
Identify the Acquired Assets and Liabilities
The next step is to take inventory of what the buyer purchased. Working from the closing balance sheet, the analyst begins identifying assets and liabilities for a purchase price allocation. This process also includes evaluating whether any intangible assets require separate reporting. This is usually the case when intangible assets come from a contract or a legal right. It is also common when the owner can sell or license it apart from the business.
Value Tangible Assets
When valuing tangibles, business appraisers use different methods depending on the type of asset. They typically value real property at current market value, machinery and equipment using replacement cost less depreciation, and inventory at the expected selling price less the costs to finish and sell it. The goal is to assign each tangible asset a value that reflects its worth in the current market.
Value Identifiable Intangible Assets
Intangible assets often carry the largest share of value in a purchase price allocation. Once again, business appraisers use different methods depending on the type of intangible asset. They typically value customer relationships using the multi-period excess earnings method. Trade names and technology are often valued using the relief from royalty method, and non-compete agreements using a with-and-without analysis. Each intangible asset also receives a useful life, which determines the amortization expense the company records after the acquisition.
Calculate Goodwill
Finally, goodwill is the amount left over after valuing assets and liabilities. Under standard GAAP, companies do not amortize goodwill. Instead, they test it for impairment when certain events indicate a possible decline in value. In either case, the goodwill balance depends on the reliability of the asset valuations.
If you are seeking a credible purchase price allocation valuation report, it is best to work with a certified business appraiser. Peak Business Valuation prepares these reports for privately held companies across the country. Schedule a free consultation below to learn more.
Documents Needed for Purchase Price Allocation
The quality of a purchase price allocation depends on the records the analyst receives. Below, we outline the key documents to gather before the work begins.
- Transaction Documents: The purchase agreement, closing statement, and earnout schedules define the consideration.
- Target Financial Statements: Audited or reviewed statements for the past two to three years show historical performance.
- Closing Balance Sheet: A trial balance and fixed asset register as of the acquisition date support the tangible asset work.
- Financial Projections: The forecast used to price the deal supports the intangible valuations.
- Customer Data: Revenue by customer, contract terms, and attrition history support the customer relationship analysis.
- Contracts and Agreements: Leases, licenses, employment agreements, and non-compete agreements point to intangible assets and assumed obligations.
Gathering these records early helps keep the valuation process on schedule.
What to Look for in a Purchase Price Allocation Valuation Report
A purchase price allocation affects the financial statements after an acquisition. As such, reviewing a purchase price allocation report before it reaches the auditor is essential. Start with the projections. The forecast in the report should match the model used to price the deal. Auditors often compare the two, and any mismatches can raise questions.
Next, review the assumptions behind the intangible asset valuations. A credible report explains how the valuation inputs support its conclusions. Pay close attention to useful lives and customer attrition assumptions. These determine future amortization expense.
Finally, consider whether the goodwill balance appears reasonable. A goodwill balance that represents nearly the entire purchase price may indicate that the analysis did not identify all significant intangible assets.
Conclusion
A purchase price allocation valuation report shows how the purchase price is assigned among the assets, liabilities, and goodwill recorded after an acquisition. Understanding what the report includes, what information it requires, and what auditors review helps companies navigate the accounting process after closing.
Peak Business Valuation is a professional appraisal firm that prepares purchase price allocation valuation reports for small businesses nationwide. We are happy to answer any questions you have about the process. Schedule your free consultation with Peak Business Valuation below to get started.
