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In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC“) Topic 805, Business Combinations, intangible assets acquired in a business combination must be recorded at their fair values on the acquirer’s balance sheet.
Customer-related intangible assets are one common type of intangible asset recorded in a business combination. Although numerous valuation methodologies may be applied to estimate the value of customer-related intangible assets, this article discusses the Distributor Method, which is a variation of the Multi-Period Excess Earnings Method (“MPEEM“).
Schneider Downs Consulting recently performed an intangible asset valuation related to the acquisition of a wholesale business (referred to as “WB”) operating in the food and beverage industry. The main driver for the acquisition, and primary intangible asset, was WB’s supplier relationships. WB essentially acted as a distributor to its customers, who largely decided to purchase from WB because WB had a reputation for sourcing products from only the highest-quality suppliers. Since the supplier relationships were the primary asset acquired, we selected the MPEEM to value the supplier relationships.
Although we originally considered the MPEEM to value WB’s customer relationship assets, the nature of the MPEEM does not allow for more than one asset of a business to be valued under this approach. Considering that WB essentially acted as a distributor to its customers, we determined that the Distributor Method would provide a reasonable indication of value for the customer relationships.
The resulting analysis of the customer relationships (and the valuation analysis of other intangible assets) was reviewed and accepted as part of the acquiring company’s annual audit to meet the requirements under ASC 805.
Schneider Downs has significant experience in determining the fair value of intangible assets acquired through business combinations in order to comply with ASC 805. For more information about Schneider Downs’ valuation and other business advisory services, please contact Stephen D. Thimons (412-697-5281; [email protected]) or Joel M. Rosenthal (412-697-5387; [email protected]).
Schneider Downs’ Financial Advisory team’s collective experience provides practical advice to guide clients through making better business decisions. We deliver actionable solutions that help make our clients’ lives easier, and make their companies even better. To learn more, visit our dedicated Business Consulting page.
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