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What Are You Really Buying in an M&A Deal?

Matt Holtz | Senior Director of Corporate Development

Imagine it is closing night for your first acquisition.  After months of due diligence, integration planning, and negotiations, you signed the papers and wired funds. Now it’s time to move from deal mode to execution, right?  Time to welcome new employees, meet new customers, and align on goals for the joint organization.

Well, not quite. There are a few other deal steps, and one in particular – M&A accounting – that deserves special attention.

Assigning Value to Different Types of Assets

Shortly after closing, your accounting team will ask how you want to allocate the purchase price across acquired tangible assets, intangible assets, and goodwill. This is the type of question that requires a strategic response.

We recommend exploring your options upfront with questions like:

  • Of the $X million you are proposing to pay, are you acquiring tangible assets such as buildings, inventory, or machinery?
  • Does your target hold mostly intangible assets like software, brands, databases, or customer relationships?
  • What premium are you willing to pay? What is the dollar value (goodwill) of collecting a specific combination of assets in one package from your target?
Tangible Assets

Tangible assets are physical items that have a useful lifespan (not consumable like printer ink or materials). For accounting purposes, these assets should ‘last’ more than one year and be used in operations to generate revenue. 

You can see, touch, or measure tangible assets.

Common tangibles include:

  • Land and Buildings
  • Machinery and Equipment
  • Inventory
  • Furniture
  • Fleet Vehicles

For tangible assets, you can get appraisals and conduct a depreciation analysis to determine a benchmark asset value. Then, physically inspect these assets and review maintenance records to get the whole picture. The real estate market may have one idea of what a building is worth, but if there are significant structural issues that may not be commonly observable, the real value of that asset is significantly different.

Intangible Assets

Intangible assets include various forms of intellectual property and ideas that hold real financial value. For example, Chick-fil-A has built strong brand name recognition which has built significant value for the business. These restaurants attract more business because customers are familiar with their products and know what to expect. 

Therefore, the ability to use that name to sell food is worth a certain amount of money that is likely greater than the same type of restaurant with the same menu under a different name – like Joe’s Chicken Sandwiches. 

Intangibles include:

  • Patents
  • Trademarks
  • Copyrights
  • Franchises
  • Licenses
  • Trademarks
  • Customer Lists
  • Software
  • Branding

Ask yourself: How well do you understand the real value of your target’s intangible assets?

For example, if you are truly acquiring customer relationships, have you completed customer reference checks?  If you are truly acquiring intellectual property, have you cross-checked the patent registrations?  Understanding the source of deal value will not only enable better diligence but also make the post-close accounting conversation a breeze.

Goodwill

Finally, there is an infinite number of different combinations of assets (both tangible and intangible) and the combined value of each situation. When you acquire a target, you are getting a packaged deal.

You are getting that company’s brand name, their customer lists, their intellectual property, their physical footprint, and so on. Goodwill is the premium that you are willing to pay for the convenience of that packaged value.

Strategy, Optimization & Execution

So, not only do you need to think about the value of each asset but you also need to consider what the bigger picture deal is worth to you. And, ideally, you account for this in your deal process so that answering the question – how do you want to allocate the purchase price – is a strategic response and not an afterthought.

During negotiations, we see clients get “deal fever” and believe a certain target is mission-critical to their long-term success.  As outside advisors, we will help you stay grounded and understand the value of the assets you are acquiring (tangible & intangible). Doing so upfront protects you against overpaying and allows us to optimize diligence for your end goals.

Contact Embarc Advisors today and take the first step toward building your strategy.

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