Purchase price allocation

Measure the consideration, value every acquired asset on market participant cash flows counted once, and reconcile the returns to goodwill. Every figure tied to its source

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XLSXDOCX16 steps

The problem

Chart's backlog valued at $370 million. Its customer relationships at $3.72 billion. Same customers

Value customer relationships on all revenue from existing customers and the orders already in backlog are counted twice. Baker Hughes' preliminary allocation carries Chart's backlog as its own asset and gives the customer relationships a 20 year life. Strip backlog from the relationship cash flows and charge every contributory asset, or the relationships are overstated and goodwill understated

The request

Project Talon: our client, a $6 billion revenue NYSE industrial, closed its $1.18 billion cash purchase of Talon on August 28, plus an earnout up to $90 million on 2027 EBITDA. Talon makes cryogenic valves, pumps and heat exchangers for LNG and industrial gas: $410 million revenue, $82 million EBITDA and $260 million of backlog. Stock purchase, no tax step up. Build the preliminary allocation for the Q3 10-Q: consideration with the earnout at fair value, customer relationships, backlog, trade name, technology, inventory and fixed assets, deferred taxes and goodwill, with IRR, WACC and WARA reconciled. Benchmark to Baker Hughes' Chart allocation. Value backlog once, never inside the relationships. Model and valuation report for the auditors; data room attached.

Talon SPA and disclosure schedules.pdf
Talon closing funds flow.xlsx
Talon closing balance sheet Aug26.xlsx
Talon board deal model Jun26.xlsx
Talon revenue by customer FY21 to Aug26.xlsx
Talon backlog by order Aug26.xlsx
Talon fixed asset register Aug26.xlsx
Talon lease schedule Aug26.xlsx
Talon inventory by stage Aug26.xlsx
Talon patents and trademarks.xlsx
Talon tax basis balance sheet Aug26.xlsx

How Axe works

ApprovedChanges asked

Your reviewApprove, or say what to change

Approved or changes

Allocation model and reportModel, report and tie out report

Final reviewApprove the revised files

Revised allocation model and reportRevised files and tie out

Step

Separate backlog from customer relationships

Prompt

Sent to the model at this step

Value backlog and customer relationships so every customer's cash flow is counted once, on the guidance in VFR Valuation Advisory #2 for customer related assets and Advisory #1 for contributory charges. Take every contributory charge from the inventory, fixed asset, workforce, trade name and technology values already set, at the rate set for each. Backlog first, order by order from the backlog file: remaining revenue and expected delivery, less the cost to fulfil it and the operating expenses still to come, since the selling is done. Take out the margin on orders that will ship from finished goods and work in process on hand, which the inventory step up already counts. Charge contributory assets for the months to delivery, tax it, discount at the backlog rate and add the tax amortization benefit. Then value customer relationships by the multi period excess earnings method on forecast revenue from existing customers, with every dollar already in backlog removed, so relationships start with orders not yet placed; new customer revenue stays out. Fit attrition to the history since FY21, revenue retained by customer each year, and test it against customers lost by count. Deduct cost of sales and the operating expenses that serve existing customers, leaving out spending to win new ones. Charge a return on working capital, on fixed assets (the depreciation already deducted is the return of them) and on the assembled workforce, and royalties for the trade name and technology; where a royalty already pays for upkeep of the name or the technology, add that marketing or development spending back so it is charged once. Discount at the relationship rate, add the tax amortization benefit over the 15 year tax life, and set the life where 95 percent of the discounted cash flow is realized. Finish by checking, year by year, that backlog, relationships, technology and trade name together claim no more than the forecast cash flow.

Uses

Revenue by customer
Backlog
Inventory by stage
Closing balance sheet
Fixed asset register
Assets and benchmarks
Forecast
Discount rates
Contributory asset valuations
Royalty valuations

Produces

Customer asset valuations

What you get back

XLSXAllocation modelConsideration, forecast, discount rates, each asset's valuation, deferred tax, goodwill and returns reconciliation

DOCXValuation reportThe allocation first, then each asset's method, inputs and life, with 10-Q note tables

Tie out reportOpen items first, then each figure marked tied, recalculated or corrected

Make it yours

Change the methods, the guideline companies or the benchmark deals, or set your firm's report template and rate build. Every step and every prompt can be edited

Customize this Agent

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