What is a Purchase Price Allocation (PPA) and why is it necessary?
Performing a Purchase Price Allocation (PPA) is a crucial part of any business takeover, where the purchase price of the acquired company is allocated to its assets, liabilities, and goodwill. A properly executed PPA ensures that your annual accounts comply with legal requirements and provides insight into the true value of your acquisition. At Match Plan, we have over 30 years of experience in conducting PPAs and support both companies and accounting firms through every step of the process.
Why perform a Purchase Price Allocation?
1. Legal obligations
After an acquisition, companies subject to audit are obligated to allocate the purchase price of the acquired company to the acquired assets and liabilities. This is done by performing a Purchase Price Allocation (PPA), in accordance with Dutch accounting guidelines (RJ) and international standards (IFRS).
2. When is a company subject to audit?
A company is subject to audit if two of the following three criteria are met in two consecutive years:
- Balance sheet total of at least €6,000,000.
- Net turnover of at least € 12,000,000.
- Minimum of 50 employees.
3. Correct application of the PPA
Proper implementation of the PPA ensures that the acquired company's financial data is correctly incorporated into the consolidated financial statements. This is essential for the transparency and compliance of the financial statements.
What elements does a Purchase Price Allocation consist of?
In an acquisition, the transaction price is allocated to the acquired assets, liabilities, and goodwill. This process is known as Purchase Price Allocation (PPA). All identifiable assets and liabilities must be measured at fair value on the acquisition date. The difference between the fair value of the assets and liabilities and the purchase price of the shares constitutes goodwill.
Tangible assets
: The valuation of tangible assets, such as land, buildings, and inventory, is generally simpler and can be achieved, for example, through appraisals of the real estate. These assets can easily be allocated to the transaction price based on their market value on the acquisition date.
Intangible assets
: Intangible assets, such as customer relationships, brand names, technologies, and patents, must also be assessed at fair value. These intangible assets are often not included on the acquired company's balance sheet and must therefore be valued separately. Valuing these assets requires specialized knowledge and experience in valuation.
Valuation methods for intangible assets
: Different methods are used to value intangible assets, depending on the type of asset:
- Customer relationships are often assessed using the Multi Period Excess Earnings Method (MEEM).
- Brand names and patents are usually valued using the Relief from Royalty (RFR) method.
- For some intangible assets, the cost approach is used, which bases the value of the assets on the costs incurred in developing or replacing them.
A Purchase Price Allocation in 6 steps
Carrying out a PPA can be a complex process, but with the right guidance, you can approach the valuation of your acquisition in a structured and efficient manner. Here's the step-by-step plan we follow:
1. Introduction and determining needs
The first step is an initial consultation to understand your specific situation and needs. We'll discuss the nature of the acquisition and the relevant information needed to execute the PPA. This helps us tailor the process to your business.
2. We will send you a quote
Based on our initial consultation and the needs discussed, we will prepare a detailed quote. This quote includes the costs and the procedure to be followed, so you know exactly what to expect throughout the process.
3. Providing documentation
For successful execution of the PPA, it is necessary to provide relevant documentation. This includes financial data, contracts, information about the acquired assets and liabilities, and other relevant documents required for the valuation.
4. Executing the PPA
In this phase, we perform the actual PPA, allocating the purchase price to the assets, liabilities, and goodwill of the acquired company. We utilize advanced valuation techniques and methods, including Discounted Cash Flow (DCF) method and Adjusted Present Value (APV) method, to achieve an accurate and reliable allocation.
5. Discuss the outcome of the PPA
After completing the PPA, we'll discuss the results with you. We'll explain the assigned values for assets, liabilities, and goodwill, ensuring everything is clear and compliant with accounting and legal requirements.
6. Handing over PPA report
The final step is submitting the PPA report, which details all valuations and allocations. This report serves as the basis for incorporating the acquisition into your company's consolidated financial statements.
Benefits of a Purchase Price Allocation
Executing a Purchase Price Allocation (PPA) is not only essential for legal and tax compliance, but also offers strategic benefits crucial to the future of your business. Here are some key benefits of executing a PPA:
Legal and tax compliance
: A properly executed PPA ensures that the acquisition complies with the reporting requirements of both Dutch guidelines (RJ) and international standards (IFRS). This prevents legal complications and ensures that your annual accounts are correctly prepared.
Insight into the real value of assets and liabilities
: A PPA provides a detailed overview of the actual value of all acquired assets and liabilities, including intangible assets such as customer relationships and brand names. This provides in-depth insight into the financial health of the acquired company.
Support for strategic decision-making
: A sound PPA helps in making well-considered strategic choices, such as integrating the acquired company and planning future investments. It also provides insight into the value that can be extracted from the acquisition.
Optimization of synergies
: By correctly allocating the value of assets and liabilities, you gain clarity on the synergies that can be realized after the acquisition. This helps maximize the value of the transaction and deploy resources efficiently.
Every PPA requires a careful approach and expertise to obtain the correct valuations. At Match Plan, we are happy to help you carry out a reliable and efficient Purchase Price Allocation that not only meets legal requirements but also provides valuable insights for the future of your business.
Tips for running a reliable PPA
Choose the right valuation method
: For an accurate PPA, it's important to apply the correct valuation methods to the assets and liabilities. Our experts use advanced techniques, such as the Multi-Period Excess Earnings Method (MEEM) and the Relief from Royalty (RFR) method, depending on the nature of the assets.
Ensure complete and up-to-date documentation
: A successful PPA requires detailed and up-to-date documentation, such as financial statements and contracts for the acquired company. This helps accurately allocate the transaction price to the assets and liabilities.
Engage a Registered Valuator
: A Registered Valuator has the expertise to conduct the PPA objectively and thoroughly. Their professional experience and knowledge ensure that all valuations are performed according to the correct standards and methods.
Focus on the legal and tax implications
: With a PPA, it's important to consider not only the financial figures but also the legal and tax implications. This ensures that the valuation complies with the relevant laws and regulations, which is essential for the correct handling of the acquisition.
Why choose Match Plan?
With over 30 years of experience in business valuations We understand the complexities of a PPA and the various factors that influence the valuation of an acquisition. Our experts can help you with:
- Determining the appropriate valuation methods for your business acquisition.
- Collecting the necessary documentation and data for an accurate PPA.
- Performing sound financial and strategic analyses.
- Drawing up a clear and detailed PPA report.
Executing a PPA is a crucial part of the acquisition, and it's essential to execute this process correctly. At Match Plan, we have the experience and expertise to guide you through this process. Contact us to discover how we can support you in a reliable and efficient execution of your Purchase Price Allocation.
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