Purchase Price Allocation: 7 Proven Methods to Maximize Value

Purchase Price Allocation: A Focus on Problem-Solving and Value Creation

Purchase price allocation (PPA) is an important step in the M&A lifecycle. It is the process of allocating the purchase price of an acquired company to its identifiable assets and liabilities. This is a complex process that can be challenging for controllers, especially if they do not have experience in PPA or if they were not involved in the M&A transaction team.

This article will focus on the challenges of PPA and how to overcome them, to help controllers solve problems and create value for their companies.

Overcoming the Typical Challenges of Purchase Price Allocation

There are a number of things that controllers can do to overcome the challenges of purchase price allocation, such as:

  • Get involved in the M&A transaction team early on: This is one of the most important things that controllers can do to overcome the challenges of PPA. Here are some of the benefits of getting involved early:

Gain a deep understanding of the transaction rationale: This includes understanding the strategic goals of the acquisition, the key assumptions underlying the purchase price, and the specific assets and liabilities that are being acquired. This information will be essential for performing an accurate and timely PPA.

Identify potential PPA issues early: By being involved in the transaction team, controllers can identify potential PPA issues early on and develop a plan to address them. For example, controllers can identify any unusual or complex assets or liabilities that may be difficult to value, or they can identify any potential accounting differences between the acquirer and the target company.

Build relationships with key stakeholders: By getting involved early, controllers can build relationships with key stakeholders such as the M&A team leader, the external accountants, and the target company’s management team. These relationships will be essential for communicating effectively and getting the information needed to perform PPA.

Streamline the PPA process: By being involved in the transaction team, controllers can help to streamline the PPA process. For example, controllers can start collecting data and preparing documentation early on, and they can work with the M&A team leader to develop a timeline for PPA.

  • Use experienced PPA advisors: Experienced PPA advisors can act as sherpas to help controllers navigate the PPA process in a variety of ways, including the following:

Identifying and valuing assets and liabilities: Experienced PPA advisors can help controllers to identify and value all the assets and liabilities of the acquired company, including intangible assets and contingent liabilities.

Applying fair value adjustments: Experienced PPA advisors can help controllers to apply fair value adjustments to assets and liabilities, as required by accounting standards.

Allocating goodwill to cash-generating units: Experienced PPA advisors can help controllers to allocate goodwill to cash-generating units in a manner that is consistent with accounting standards.

Disclosing PPA information in the financial statements: Experienced PPA advisors can help controllers to disclose PPA information in the financial statements in a manner that is compliant with accounting standards and that provides investors with useful information.

  • Use appropriate tools and resources: There are a number of resources that can be helpful to controllers in a PPA, such as:

Accounting standards: The accounting standards provide guidance on the PPA process. Controllers should review the accounting standards to ensure that their PPA is compliant.

IRS Guidance: The IRS publishes guidance on the PPA process in a variety of formats, including regulations, revenue rulings, and revenue procedures. Controllers should review the IRS guidance to ensure that their purchase price allocation is compliant. For example, IRS Instructions for purchase price allocation form 8594 can provide insight.

Professional organizations: Professional organizations, such as the American Institute of Certified Public Accountants (AICPA), publish guidance and resources on PPA. Controllers can access this guidance and resources through their professional organizations.

External advisors: External advisors, such as accountants and lawyers, can provide guidance and assistance with the PPA process. As noted above, bringing in an experienced purchase price allocation valuation firm provides significant benefits. Experienced purchase valuation experts have the expertise and knowledge to help controllers navigate the complex purchase price allocation process; they are objective and unbiased, which can help controllers to make sound decisions; they have access to a variety of resources, such as proprietary software tools and databases, which can help them to complete the purchase price process efficiently and accurately; and they have experience working with a variety of companies and industries, which can help them to identify and address potential purchase price allocation issues.

  • Communicate with auditors and external accountants: It is important to communicate with auditors and external accountants early and often throughout the purchase price allocation process. The benefits of doing so are multi-layered:

Guidance: Auditors and external accountants can provide guidance on the purchase price allocation process and on accounting standards. This guidance can be helpful for controllers who are new to purchase price allocation or who are unfamiliar with the accounting standards.

Feedback: Auditors and external accountants can provide feedback on the purchase price allocation plan and results. This feedback can help controllers to identify and address potential problems.

Support: Auditors and external accountants can provide support to controllers throughout the purchase price allocation process. This support can be helpful for controllers who are facing challenges or who have questions.

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How to Create Value with a Purchase Price Allocation

Purchase price allocation can be used to create value for companies in a number of ways. Here are 7 key tips to create value using PPA:

  1. Improving the accuracy of financial statements: PPA ensures that the financial statements of an acquired company accurately reflect its assets and liabilities. This can improve the company’s creditworthiness and make it more attractive to investors.
  2. Reducing the risk of goodwill impairment: By properly allocating the purchase price to identifiable assets and liabilities, controllers can reduce the risk of goodwill impairment. This can improve the company’s bottom line and make it more profitable.
  3. Identifying and realizing synergies: PPA can help controllers to identify and realize synergies between the acquired company and the acquirer. This can improve the company’s operational efficiency and profitability.
  4. Perform a pre-PPA analysis during the transaction phase: This can help to identify potential PPA issues and to develop a plan to address them.
  5. Use a systematic approach to PPA: This will help to ensure that the PPA process is efficient and effective.
  6. Document the PPA process thoroughly: This will help to support the PPA conclusions and to make it easier to update the purchase price allocation in the future.
  7. Monitor the PPA over time: This will help to ensure that the PPA remains accurate, and that the goodwill amount is recoverable.

 

Purchase Price Allocation and Valuation Creation

Controllers can play a vital role in helping their companies to overcome the challenges of purchase price allocation and to create value. By getting involved in the M&A transaction team early on, working with experienced purchase price allocation valuation experts, using appropriate tools and resources, and communicating with auditors and external accountants, controllers can help to ensure that the purchase price allocation process is completed accurately and efficiently. Purchase price allocation can help companies to improve the accuracy of their financial statements, reduce the risk of goodwill impairment, and identify and realize synergies.

 

Experience the Eton Advantage

 
 At Eton Venture Services, we are experts at delivering rigorous and defensible purchase price allocation servicesEton’s team of experts specializes in providing accurate, compliant, and independent valuations that protect your interests and ensure compliance. Join the industry leaders who have already experienced the benefits of Eton’s exceptional client service and valuation expertise. Let Eton guide you through the complexities of intangible asset valuation for financial reporting purposes. Contact Eton today.
President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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