Purchase Price Allocations (PPA's)

When a Business is Bought, the Buyer is expected to allocate the Purchase Price across all the Assets of the Target. Some of these Assets may already exist, and others may need to be identified and valued.

The process is complicated and involves understanding what exactly has been Bought and how much was Paid for this.

In any M&A transaction, the Acquirer must, in terms of “IFRS 3: Business Combinations” allocate the Price it has paid for the Target across the Assets of the Target.

This process can be very daunting and so we have set out the following steps to make it easier for you.

1. What did you actually buy?
We like to compare the Target to a large Bucket in which a large number of different-sized objects are placed, and we need to understand exactly what these objects are.

A good starting point is to work out the size of the Bucket, and, for this reason, I always calculate the Enterprise Value of the Target. The next part is quite easy, and that is looking at the Existing Assets, which can usually be found on the Balance Sheet. We may have to tweak these a bit to make sure they are fairly valued, but with the accounting world moving towards a Fair Value Regime, this should not be too much of a difficult task.

We then spend time identifying (and valuing) a group of New Assets. Because of strict accounting rules, these would not have been seen on the Balance Sheet, but they definitely do have value. They are typically Intangible Assets (so refer to my “Intangible Assets” section for how we go about valuing these).

Unfortunately, the sum of the Existing Assets and the New Assets very rarely adds up to the Enterprise Value, which means that there is “Other Stuff” inside the Bucket. Because it is probably too difficult to measure or quantify this Other Stuff, we acknowledge that it has value and give it a formal name of “Goodwill”. We like to call it “Economic Goodwill” for reasons you will see just now.

2. What did you Pay for the Target?
Now that you know what you bought, we now need to understand what you actually paid for the Target. We call this the Purchase Consideration, and this is so much more that “just” the Upfront Cash.

3. The Allocation
We now bring together the pieces of the puzzle and compare the Enterprise Value (Step 1) to the Purchase Consideration (Step 2). If we have paid “more” than we should have, then this excess is also called Goodwill. We like to distinguish this from the Goodwill in Step 1 (Economic Goodwill) because it arose from a different source, and therefore call it Transactional Goodwill.

Presented alongside are some other items which may also be included in the Purchase Consideration.

Please Contact us for more information on how we can assist you with any Purchase Price Allocation queries that you may have.