Valuation & Litigation Services Blog


Drafting Considerations for Attorneys Blog Series – M&A Purchase Price Allocations

The fields of law, accounting and valuation are only continuing to become more complex.  Given the overlap in these areas of specialty, it is increasingly important for attorneys to have an understanding of the accounting, tax and valuation effects of the legal agreements they draft.  Armed with this knowledge, lawyers can produce the intended outcome for their clients and minimize unintentional consequences and compliance burdens.  If you would like to download our full eBook, which includes all of the blogs in this series, you can do so here.


Every M&A transaction has some valuation component to it – specifically, determining the purchase/sale price.  There are also “hidden” VALUATION issues that need to be addressed by buyers in accounting for an acquisition such as the purchase price allocation (which may require an intangible asset valuation) and earnouts.

Purchase Price Allocation

Accounting rules require that each asset and liability acquired/assumed by the buyer in an acquisition be recorded at “fair value” based on the guidance in ASC 805 – Business Combinations.  This includes internally-developed intangible assets of the target company that were not previously on the books.  Preparing a purchase price allocation can be an involved and time consuming process, so it is important that the buyer be prepared for this once the deal closes.

The valuation of a company’s intangible assets is a high-risk area for auditors due to the subjective nature of valuation and increasing pressure from regulatory bodies regarding valuation estimates in financial statements.  As a result, the values assigned to acquired intangible assets in a purchase price allocation will be an area that a company’s auditors investigate thoroughly.  Given the complexities associated with valuing a company’s intangible assets and the level of auditor scrutiny that is expected, this process often requires the use of a valuation expert.  It should be noted that the estimated values assigned to intangible assets in a purchase agreement are unlikely to be consistent with the value determined by a valuation expert unless previous valuation analysis has been performed.

Intangible assets generally fall into one of the following groups:

  • Artistic-related
  • Customer-related
  • Contract-related
  • Marketing-related
  • Technology-related

The most commonly recorded intangible assets are as follows:

  • Customer relationships
  • Tradenames/Trademarks
  • Non-competition agreements
  • Technology/Patents
  • Permits
  • Backlog

The accounting policy elections made by a company determine the extent of valuation analysis required for acquired intangible assets:

  • GAAP – All acquired intangible assets are valued and recorded.
  • Private-Company GAAP Alternative – Privately-held companies have an accounting alterative available to them in which no valuation analysis is required for customer-related intangible assets and non-competition agreements. Instead, those assets can simply be included in goodwill (the excess of the purchase price over the fair value of the net tangible and separately-valued intangible assets acquired).  Because customer relationships and non-competition agreements are two of the most common and most valuable intangible assets, it is possible that no intangible assets will need to be recorded outside of goodwill in certain cases.  Acquired companies with significant tradename, patent or technology value, however, would still require separate valuation of those intangible assets even under the private-company GAAP alternative.

If the private-company GAAP alterative is selected by the acquiring company, it must also make another private-company GAAP alternative election to amortize goodwill over a period not to exceed 10 years.  In addition, if a company makes the election to group customer relationship and non-competition agreement value with goodwill, it must also do so for all future acquisitions (the buyer cannot choose to value these assets in some acquisitions going forward, but not in others).

Continue reading about the key accounting, tax and valuation considerations of buy-sell agreements in our e-book: Drafting Considerations for Attorneys: Buy-Sell Agreements, Accounting, Tax and Valuation Issues. Click here to download your free copy.

Drafting Considerations for Attorneys

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