How to Calculate a PPA Valuation
If you own a business or plan on acquiring one, understanding the true value of the business is pivotal. As such, it is beneficial to receive a purchase price allocation valuation. Purchase price allocation (PPA) is the process of valuing each asset and liability of a business. This helps business owners or prospective buyers gain a thorough understanding of a business’s value. For instance, a business worth $12 million may comprise $2 million in real estate, $3 million in equipment, $5 million in customer relationships, and $2 million in intellectual property (2 + 3 + 5 + 2 = 12). These insights can help business owners make strategic decisions when buying or expanding a business.
When seeking a PPA valuation, it is crucial to work with a quality business appraiser. Peak Business Valuation is happy to help! As a professional business appraiser, Peak works with thousands of businesses throughout the United States. This includes providing purchase price allocation valuations. We are happy to provide you with a PPA valuation and answer any questions you may have! Start today by scheduling your free consultation with Peak Business Valuation below.
Understanding Purchase Price Allocation
Business appraisers consider several factors when conducting a PPA valuation. This generally involves assessing the business’s assets, liabilities, market conditions, etc… In addition, valuation experts may perform the valuation with various valuation methods such as the market approach, income approach, and/or asset approach. The PPA valuation process helps business owners understand how their business’s value is distributed. To learn more, see What is a Purchase Price Allocation Valuation or How to Value a Business.
In this article, we discuss how to calculate a PPA valuation. If you have any questions, schedule a free consultation with Peak Business Valuation!
Identifying Assets and Liabilities
As part of a purchase price allocation valuation, business appraisers must identify and organize the assets and liabilities of a business. Assets are generally classified as either tangible or intangible. In contrast, there are various ways to categorize liabilities. In many cases, liabilities are associated with their repayment schedule, such as long-term debts or current debts. By identifying and organizing these elements, business appraisers can comprise a clear and detailed valuation report. To learn more, check out Identifying Assets and Liabilities for a Purchase Price Allocation.
Valuing Tangible and Intangible Assets
Next, business appraisers assess the value of tangible and intangible assets. Tangible assets are physical resources such as buildings and machinery. On the other hand, intangible assets are non-physical resources. This can include trademarks, customer relationships, and goodwill. Understanding the value of tangible and intangible assets provides insights into a business’s strengths and weaknesses. This can help business owners understand how to maximize the value of a business. Additionally, the asset evaluation helps participants understand the business’s asset portfolio and make informed decisions.
Assessing Liabilities
Furthermore, business appraisers assess the liabilities of a business during a PPA valuation. Liabilities can include outstanding loans, pending legal claims, or other obligations that a business must fulfill. Liabilities have a direct impact on the overall value of a business. As such, quantifying a business’s liabilities helps business owners and potential buyers understand the risks associated with the business. In addition, this information creates a foundation for structuring deals during negotiations.
As a reputable business appraiser, Peak Business Valuation is experienced in purchase price allocation. We can help you succeed by providing a PPA valuation! Peak can also answer any inquiries you may have on purchase price allocation or valuing a business. Schedule a free consultation with Peak Business Valuation today!
Calculating Goodwill
Another critical step during purchase price allocation is calculating goodwill. Goodwill represents the intangible factors that contribute to a business’s success. As such, goodwill has a strong influence on a business’s overall value. Some common factors that impact goodwill are brand reputation, customer loyalty, and supplier/business relationships.
Business appraisers calculate goodwill by subtracting the value of tangible and intangible assets from the total value of the business. For example, if tangible and intangible assets have a combined value of $3 million and the total value of the business is $6 million, goodwill is valued at $3 million (6 – 3 = 3). Understanding the goodwill of a business is essential. It indicates the business’s market position, customer base, and potential for future growth. See The Impact of Goodwill on a Business Valuation to learn more.
Determining Fair Value Adjustments
After evaluating a business’s assets, liabilities, and goodwill, business appraisers update the previously reported values to reflect their current fair market value. To do so, valuation analysts consider various factors such as market trends, economic conditions, and industry standards. This process ensures accuracy for financial reporting. As such, fair value adjustments are crucial for stakeholders, investors, and regulatory compliance. By determining fair value adjustments, business owners can enhance financial planning and understand the next steps to increase the value of the business.
The PPA Valuation Report
Finally, valuation analysts compile the findings of the purchase price allocation into a PPA valuation report. This report outlines the details of assets, liabilities, valuation methods, and the overall value of a business. In addition, the PPA valuation report highlights the risks and opportunities of a business. This information is vital whether you are buying, expanding, or selling a business. Read Reviewing a Purchase Price Allocation (PPA) Report to learn more.
Conclusion
Purchase price allocation is a useful tool for business owners or prospective buyers of a business. By receiving a PPA valuation, business owners gain a comprehensive understanding of a business’s value. This promotes informed decision-making, accurate financial reporting, and a strong foundation for negotiations. For more information, see Understanding a Purchase Price Allocation Valuation. If you plan to obtain a PPA valuation, it is important to connect with an experienced business appraiser.
Peak Business Valuation, business appraiser, is here to assist! At Peak, we regularly work with individuals who are buying a business or expanding businesses. This often involves conducting purchase price allocation valuations. We are happy to provide you with a PPA valuation! In addition, Peak can discuss any questions you may have on valuing a business. Schedule your free consultation with Peak Business Valuation to get started!
