Valuation Requirements for Business Combinations

By: PJ Patel

Valuation Requirements for Business Combinations


Hello, I’m John Bintz and this is PJ Patel, and we are both managing directors at Valuation Research Corporation. PJ is the financial reporting practice leader and deals primarily with business combinations and impairment testing. PJ, in a business combination, what are the valuation requirements?

PJ Patel: Business combinations are governed by ASC 805. And, in that, you need to value the assets, liabilities as well as any non-controlling interests that are acquired as part of the transaction. As part of a business combination, we typically value items like real property, personal property, intangible assets such as trademarks, technology and customer relationships. In certain situations, we also value inventory and deferred revenue.

John Bintz: When do clients engage you?

PJ Patel: Typically, these valuations are required post-transaction. However, more and more, we’re seeing clients engage us pre-deal, especially large public companies or privately held companies, to help assess whether a deal is accretive or dilutive, or for public filings.

John Bintz: Why is it important to do a valuation prior to an acquisition taking place?

PJ Patel: There are multiple reasons. Clients often want to determine whether a deal is accretive or dilutive. So we will provide them with an estimate of the value of the assets as well as the economic life, for their modeling purposes. Also, under ASC 805, there are accelerated public filing requirements. Our valuation can assist companies in providing this data for their public filings.

John Bintz: PJ, valuing intangible assets seems like a concept that’s hard to grasp and hard to understand. How do you determine the value of assets and intangibles?

PJ Patel: Valuing intangible assets…it’s a non-linear exercise. We’d review qualitative information as well as quantitative information, so we’ll get a good understanding of the business as well as the individual intangible assets or other assets of the business that we’re trying to value. And then, on top of that, we’ll layer the quantitative information, the revenues, the earnings and market share data that may exist. In addition, we put a stake in the ground where we can for different assets, based on market data. We then go back and review the inputs and assumptions that we’ve used to value each of the assets, to make sure that they make sense and that our value conclusions make sense.

John Bintz: What should one look for when hiring an independent valuation firm in doing valuation services?

PJ Patel: There are some basic concepts, like who’s gonna do the work, what are their credentials, and what experience do they have in doing these sorts of valuations and getting them through third-party scrutiny? However, more and more, what we’re seeing is that clients appreciate our ability to think about the value of assets and liabilities from a business person’s perspective and bridge the accounting and finance concepts to provide a valuation that makes sense for all stakeholders.

John Bintz: PJ, we appreciate your time and thank you very much for your insight and your remarks on this topic.

PJ Patel: Thank you.