If your company is planning an acquisition, you will likely be required to have a purchase price allocation performed to comply with generally accepted accounting principles, or GAAP. But even if you aren't obligated to do so, the current business environment has made it more important than ever for buyers to get a qualified, independent valuation for their financial statements.

What is a Purchase Price Allocation?
The term purchase price allocation, or PPA, refers to assigning a portion of the company's purchase price to each of the tangible and intangible assets acquired in a transaction. A key part of that process is determining a fair value for intangible assets that may not appear on the acquired company's books, including trade names, customer relationships, non-compete agreements and intellectual property, such as patents, technology and proprietary software. A PPA is performed using valuation techniques that isolate the economic benefits that each acquired asset adds to the value of the business. In addition, qualitative factors, such as the buyer's rationale for the acquisition and the financial circumstances of both businesses, may affect the true value of the transaction and its impact on the company's overall financial condition.

Do it Once, Do it Right
The primary objective of a PPA is to ensure that acquired assets and liabilities are correctly stated in company financial statements. Auditors increasingly expect a rigorous analysis that is grounded in sound valuation theory. If not done properly, you will likely face a difficult – and more expensive – audit review process. The PPA may be rejected, either in whole or in part, and need to be redone. But even before you get to the audit stage, the quality of a PPA can make a big difference. In a typical merger and acquisition (M&A) transaction, many parties – investment bankers, commercial bankers, attorneys and accountants – need to examine the same financial information for their due diligence. Especially at a time when company resources are stretched thin by an acquisition, a well-executed PPA can effectively leverage information that has already been generated in order to minimize the additional burden on key employees.

Use a Professional
Because the results of a PPA may materially impact your company's net income, today many auditors will request it be executed by an unrelated third party. But there are other benefits to working with a professional. With in-depth knowledge of PPA accounting rules and the audit process, an experienced valuation professional can help management determine which acquired assets are material. In that way, the scope of the due diligence and the level of rigor can be adjusted appropriately, allowing time and money to be focused on the critical issues. In addition, by identifying relevant factors to consider before the deal takes place – including cash flow, possible risks and the likely short- and long-run effects on earnings – a professional can help your company determine the most appropriate purchase price to pay for an acquisition target.

If you have questions about a purchase price allocation or would like more information, please contact Paul du Vair at 312-595-8534 or

This article originally appeared in the 2006, 4th quarter edition of the Mesirow Financial Quarterly. Click here to access the current and all past issues of the Quarterly.