Signing the giảm giá khuyến mãi to lớn buy or sell a company is often the most memorable moment for those involved in an M&A transaction. However, it is only one of the stages within the M&A lifecycle, in which each step impacts the other ones. In this article we will take a closer look at one of the steps that should be taken after the giảm giá has been closed: the Purchase Price Allocation (PPA).
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Integration of financial statements
The khuyễn mãi giảm giá has been closed, the M&A advisors và lawyers have sầu left the scene và the integration of the acquired business has started. Then the external accountant knocks at the proverbial door: the transaction needs to lớn be properly recorded in the financial statements. After all, the consolidated annual report should now represent the acquired company. This may seem trivial – and maybe a bit dull – but this is an activity that needs to lớn be dealternative text with as soon as possible with as little effort as possible. You only need the balance sheet of the acquired company, right? How hard can that be? Well, at times it’s actually not that simple...
Alignment of accounting principlesIt may be that the acquired company adopts accounting principles that are different from the acquirer. Therefore, as a first step, the financial statements of the acquired company need khổng lồ be aligned with the accounting principles of the acquirer. In case the acquired company is lớn switch from Dutch GAAP (RJ) khổng lồ IFRS, this could be quite a significant exercise with, for instance, requirements of IFRS 15 (revenue recognition) or IFRS 16 (lease accounting).
Allocating the purchase priceSubsequently, the financial reporting standards (RJ & IFRS) require that the purchase price paid (in a business combination) needs to lớn be allocated khổng lồ the assets acquired & liabilities assumed, a process that is also referred to lớn as a ‘purchase price allocation’ or PPA. This can be a tricky business. For starters, the purchase price may not have sầu been paid exclusively in cash, but also partly in equity, or in deferred or conditional payments lượt thích earn-outs, which means that the definitive value of the purchase price might not be entirely clear at the moment the PPA is performed.
Fair value adjustmentsAn accurate and reliable estimate of the purchase price is required to lớn determine the goodwill amount that is paid in the transaction. Goodwill is the difference between the value of the net assets acquired and the price paid for the shares. However, this goodwill amount may not be the figure that will be recognised in the balance sheet. The purpose of the PPA is khổng lồ evaluate if the fair value of all assets and liabilities on the opening balance sheet is different from the stated book value. If there are material differences between fair value và book value, the asset or liability is revalued in the balance sheet to lớn its fair value, with the goodwill amount as balancing công trình. The usual suspects for revaluation include real estate, machines và equipment, inventory, investments in associates, but possibly also long-term loans.
Identification, recognition & valuation of new assets và liabilitiesIn addition to lớn potential fair value adjustments for existing items on the opening balance sheet, the acquired entity may also have assets and liabilities that did not meet the criteria for recognition before. For example, if a company has an internally developed reputable brand name for its sản phẩm sold, this brand would not show on the balance sheet. When this company is acquired, the buyer will certainly have considered the brvà in the purchase price he was willing khổng lồ pay and will in turn have sầu paid ‘goodwill’ for it. In that case, the reporting standards require the valuation và recognition of the brand name in the books. Other examples of such identifiable items are the customer relationships, databases or contracts, intellectual property, favourable or unfavourable contracts & contingent liabilities.
Goodwill and cash generating unitsAfter allocating the purchase price as much as possible to all assets acquired và liabilities assumed, what remains is goodwill - the residual value that the company expects khổng lồ monetise in the future from assets that bởi not exist today, such as growth from future customers or synergies effects. The reporting standards require that this goodwill amount is subsequently tested yearly lớn see if it can be recovered by the business. When it appears that the goodwill is not recoverable (in whole or partly), this results in an impairment of goodwill. To properly monitor the recoverability over time, và in the case of multiple cash-generating units – the smallest group of assets that independently generates assets from the rest of the business, such as a business unit or sản phẩm segment – the final goodwill amount needs to be allocated khổng lồ the cash-generating units.
Challenges for the controllerIn many cases the person who is instructed to perkhung the PPA (the internal financial controller) has not been part of the M&A transaction team. The professionals who were on this team are now too busy working on a new deal. Also, a purchase price allocation is a rare sự kiện for many controllers; there is no need for most of them lớn specialise in this type of accounting as a PPA may only occur once in every few years. Can you imagine the challenge for this person?
With limited experience in the field of PPA, not having participated in the transaction process và often without tư vấn from the M&A transaction team và proper (internal) transaction documents, the controller has to lớn – amongst others – find out what has been agreed in the tóm tắt purchase agreement (SPA), to lớn determine the actual purchase price, understand the assumptions underlying the financial forecast used as a basis for the purchase price paid, & lớn value newly identified assets.
An unpleasant surprise?The PPA may have an impact on the future balance sheet as well. For instance, the amortisation of a newly recognised brand name will reduce the net profit và could therefore have a negative impact on the dividover capađô thị of the company. Also, (fair value) adjustments lớn inventory or the recognition of favourable contracts could have an impact on future EBITDAs. This can be a very unpleasant surprise post-transaction. Performing a pre-PPA analysis during the transaction phase could have revealed these effects beforehvà.
How to focus on creating actual valueThis is why it is so important to lớn acknowledge that an M&A deal is in fact a cycle, where each step impacts the next ones. In an ikhuyễn mãi giảm giá M&A cycle, a pre-PPA analysis, focussing on the early identification of acquired assets & synergies, & on what the (consolidated) post-giảm giá financial statements would look lượt thích, is performed before closing the deal. Also, the financial controllers who are delegated khổng lồ perform the purchase price allocation require proper tư vấn và accurate documentation khổng lồ swiftly prepare the work and obtain approval from the external accountant. This makes sure the company can focus on what actually adds value: delivering the promised returns after the transaction, which is the last step of the M&A cycle và the topic of our next article.
The M&A cycle in a nutshellBelow we have sầu embedded a picture of the M&A lifecycle & a short description of each phase. In the coming months we will publish a series of articles on each step of the M&A lifecycle, sharing stories and thoughts about each of these phases of the M&A lifecycle to lớn offer you insight in the entire process & help you benefit from the promised returns of a giảm giá khuyến mãi. In the lifecycle we will emphasise the integration of your steps và actions, và what might happen if you deal with every step in isolation.
Identify the Right Deal. Either through active sầu selection of companies or business units, or by reacting to offers in the market (one-on-one or by auction). This phase involves setting corporate strategy, identifying growth areas or selling non-core activities.
Pricing và offer. Initial pricing of a company & assessing how easy or difficult integration or separation is going to be, as well as which legal and tax structure will be most suitable (và its impact on pricing).
Perkhung due diligence. What do we buy? It is crucial lớn assess the real value of the company, the presence of ‘skeletons in the closet’, financial aspects such as balance và cash flow as well as non-financial analyses (e.g. company culture, integrity, operational synergy benefits, và operational analysis of real estate).
Execution. After the due diligence phase, a Sales & Purchase Agreement is drafted, the relevant authorities are informed and consulted, & the ‘closing’ procedures are executed.
Deliver the Promised Returns. After the transaction has been completed, the expected results must be achieved – how to realise synergies & to lớn prsự kiện that in a future strategic re-assessment the new business will be considered as a non-core activity & be resold (without any added value).And the final step:Post-Merger Integration.