Modeling roll-ups

Based on the most helpful WSO content, here's what you need to know about allocating the fair value of a new acquisition across assets, liabilities, and goodwill, especially for an asset-light business with significant intangibles:

1. Fair Value Allocation Process:

   • Identify and Measure Fair Value: Start by identifying and measuring the fair market value (FMV) of all identifiable assets and liabilities of the acquired business.
   • Allocate Purchase Price: Allocate the purchase price to these identifiable assets and liabilities based on their FMV.
   • Goodwill Calculation: If there is any unallocated purchase price after this process, it is classified as goodwill. Goodwill represents the excess of the purchase price over the FMV of the identifiable net assets.

2. Goodwill Calculation Formula:

   • Formula: Purchase Price Paid - FMV of Identifiable Net Assets = Goodwill Recorded.

3. Considerations for Asset-Light Businesses:

   • Intangibles: For businesses with significant intangibles (like relationships), ensure these are properly valued and included in the FMV of identifiable assets.
   • Standard Allocation Methodology: While the general process of fair value allocation is standard, the specifics can vary based on the nature of the business and the types of assets and liabilities involved. Asset-light businesses with significant intangibles may require more detailed valuation of those intangible assets.

4. Adjustments to Parent Balance Sheet:

   • New Debt or Equity: Reflect any new debt or equity issued by the parent company.
   • Cash Payments: Deduct cash payments from the parent’s balance sheet.
   • New Shares: Reflect the increase in parent share capital if new shares are issued.
   • Transaction Fees: Expense transaction fees, affecting cash and retained earnings.
   • Goodwill Addition: Add the calculated goodwill to the parent’s balance sheet under assets.

In summary, while the allocation methodology follows a standard process, the specifics can vary based on the business's nature and the types of assets and liabilities involved. For asset-light businesses with significant intangibles, ensure these are properly valued and included in the FMV of identifiable assets.

Sources: Goodwill Question, Q&A: Big Four Valuation Associate - Deciding Whether This Job Is Right For You, Q&A: Big Four Valuation Associate - Deciding Whether This Job Is Right For You, Notes for Technical Interview Questions, Roll-up acquisition PE questions