By Andy Clausen, Managing Director of Business Valuation
Purchase Price Allocations (PPAs) are more than a post-close formality. For private equity firms, they represent a key step in translating deal value into financial reality. However, they also attract scrutiny from auditors who want assurance that fair value conclusions are supportable and aligned with ASC 805. This guide will help private equity professionals anticipate challenges, streamline audit reviews, and ensure their PPAs stand up to rigorous examination.
1. Know What Auditors Are Really Looking For – Auditors approach PPAs with a few core objectives:
- Are the methodologies consistent with ASC 805?
- Are the assumptions (discount rates, useful lives, etc.) reasonable and documented?
- Is the allocation logically and numerically reconcilable to the total purchase price?
Tip: Align your valuation report with the audit firm’s preferred structure. Some firms use proprietary checklists, so ask for them early.
2. Support Key Assumptions with Data – Auditors challenge assumptions that aren’t backed by market data or internal documentation. Be especially vigilant with:
- Customer attrition rates
- Royalty rates for trade names or tech
- Forecasted revenue or margins
- Useful lives of intangibles
Tip: Create a source-of-assumptions memo summarizing inputs, references, and rationale.
3. Engage Your Audit Team Early – Avoid surprises by proactively involving the audit firm as soon as the draft valuation is ready. This:
- Allows them to flag unusual asset classes or modeling choices
- Builds rapport and reduces adversarial review
- Minimizes post-year-end delays
Tip: Treat the auditor like a partner. Ask about preferred valuation formats or any red flags they’ve seen in similar deals.
4. Keep Models and Reports Audit-Friendly – A good PPA model should be:
- Transparent (no black-box formulas)
- Reproducible (easy to trace inputs and calculations)
- Tied out (reconciled to the purchase price and opening balance sheet)
Tip: Assemble an audit binder with the final valuation report, model in Excel, and key source documents (contracts, forecasts, market comps).
5. Choose a Valuation Provider That Speaks Audit – Not all valuation firms are created equal, and auditors know this. Use a provider with:
- Experience defending PPAs in audit settings
- Industry-relevant benchmarks and databases
- Direct communication channels with the audit firm
This can make all the difference.
Tip: Ask your audit partner whom they trust. Many have an informal shortlist of preferred valuation providers.
6. Use the PPA to Establish a Strong Accrual Basis – Small to mid-size transactions often come with challenges related to tangible asset valuations. Targets frequently operate on a cash or modified accrual basis, have fixed assets that haven’t been adequately maintained, or possess stale balance sheet reconciliations. Auditors prioritize accuracy and reliability in financial reporting and strongly prefer valuations grounded in a clear accrual basis.
Tip: A PPA provides the ideal opportunity to reset and establish a robust accrual accounting framework, addressing prior gaps and aligning the acquired entity’s financial reporting practices with auditor expectations.
For private equity firms, a solid PPA is more than compliance; it’s part of post-close execution. When the audit team sees a thoughtful, well-supported valuation, it builds confidence in the sponsor’s professionalism and paves the way for smoother portfolio reporting. Treat the PPA as a strategic step, not a check-the-box task, and your audit experience will reflect it.
Want help preparing a bulletproof PPA? Contact Andy Clausen at [email protected] for a consultation tailored to your portfolio.