Management Involvement in Purchase Price Allocations
By Sean R. Saari, CPA/ABV, CVA, MBA
It is common for companies to bring in a third-party valuation expert to value the intangible assets acquired in a business combination for financial reporting purposes. It is important to note that even when a third-party valuation analyst is involved, a considerable amount of time will need to be devoted by management in order to complete the valuation analysis.
The valuation of intangible assets is not a “hands-off” process for a company’s management. Actually, purchase price allocation valuation engagements often require the most involvement of company management of any type of valuation. Why? The valuation of intangible assets requires the development of a number of assumptions and estimates about the company’s future operating activity. The valuation analyst cannot make these items up as he or she goes along – instead, it requires a significant commitment by management to assist the valuation expert with developing appropriate estimates that will pass auditor scrutiny.
If such a high level of management involvement is required for intangible asset valuations, you may ask, “Why should I hire a third-party valuation analyst at all?” The benefits of using a valuation analyst to assist with the purchase price allocation are that he or she can do the following:
- Ask the right questions to draw out the necessary information to properly complete the analysis
- Develop financially and technically sound valuation models
- Address inconsistencies in management estimates (in comparison to prior operating activity) before your auditor makes an issue of them
- Prepare a sound report that will answer many of the questions that your auditors will have regarding the determination of the intangible assets’ values
- Provide you with someone who will stand up for his or her analysis and work with the auditors to resolve any issues, saving you time from having handle this yourself
Remember, if you are in need of a purchase price allocation/valuation of intangible assets, bringing in a third-party expert to perform the valuation does not mean that you are “off the hook” at that point. The valuation process often turns into a collaborative matter in which both the analyst and management work together to create a supportable analysis.