You’ve acquired a business for €10 million. The deal is done — but your financial statements don’t yet reflect what you’ve actually bought.
Under IFRS 3, you are required to translate that purchase price into identifiable assets, liabilities and goodwill. This is not just a compliance exercise — it is a structured process to ensure your financials accurately reflect the economic substance of the transaction.
This case study walks through a simplified Purchase Price Allocation (PPA) for a fictional Dutch SME: Heatpump BV.
Heatpump BV: a transition-driven acquisition
As the built environment decarbonises, demand for heat pumps continues to grow. Heatpump BV, a regional installer with established technical capabilities and customer relationships, represents a typical SME acquisition in a transition-driven sector.
From transaction price to balance sheet
Following the acquisition, the purchase price must be allocated across identifiable assets and liabilities:
Purchase Price Allocation summary
| Component | Value (€m) |
| Technology | 4.4 |
| Customer relationships | 0.8 |
| Trade name | 1.4 |
| Other net assets* | 4.5 |
| Deferred tax | (1.9) |
| Net identifiable assets | 9.2 |
| Goodwill | 0.8 |
| Total | 10.0 |
*Other net assets = tangible assets + working capital + cash – debt
This bridge converts a transaction price into a defensible representation of what has been acquired.
Technology (€4.4m): the operational engine
Heatpump BV’s value is not driven by patents, but by practical know-how:
- installation techniques
- system optimisation
- supplier and component integration
This operational capability supports margins and scalability.
The valuation focuses on a key judgement:
How long does this know-how remain economically relevant?
We apply a finite-life earnings approach:
- forecast earnings supported by the technology
- incorporate gradual obsolescence
- discount at a technology-specific rate
In a fast-evolving sector, this balance between durability and innovation is critical.
Customer relationships (€0.8m): value and attrition
The company benefits from:
- an installed base
- recurring maintenance activity
- referral-driven growth
However, these relationships are not fully contractual, making attrition a key driver.
We apply the Multi-Period Excess Earnings Method (MPEEM):
- start from revenue generated by existing customers
- model attrition explicitly
- estimate associated cash flows
- deduct contributory asset charges (CACs)
The residual cash flow represents the value of the customer base.
The relatively modest value (€0.8m) reflects:
- limited contractual lock-in
- competitive installer dynamics
Trade name (€1.4m): local brand power
Heatpump BV operates as a recognised regional brand associated with:
- reliability
- sustainability
- technical expertise
This supports customer acquisition and pricing at a local level.
We apply a relief-from-royalty method:
- estimate revenue attributable to the brand
- apply a market-based royalty rate (1.5%)
- tax-effect the resulting royalty stream
The key judgement here is not the method — but the appropriateness of the royalty rate and brand relevance in a regional market.
Other net assets (€4.5m): the balance sheet backbone
This component captures:
- tangible assets (PP&E)
- working capital
- cash and debt
Importantly, this line represents the balance sheet backbone of the business, and acts as the bridge between enterprise value and equity value within the PPA.
This is often where confusion arises in practice — particularly around the treatment of debt and its interaction with transaction value.
Deferred tax (€1.9m): a critical adjustment
The deferred tax liability is a key — and often misunderstood — component.
It arises because:
- intangible assets are recognised at fair value for accounting purposes
- while their tax base is typically lower (often nil)
This creates a taxable temporary difference, meaning tax will effectively be paid in the future as these values are realised.
The deferred tax liability therefore reduces the net identifiable assets recognised at acquisition.
Goodwill (€0.8m): the residual
After allocating identifiable assets and liabilities, the remaining value is goodwill.
This captures:
- expected synergies
- workforce-in-place
- future growth beyond identifiable assets
A relatively modest goodwill balance suggests that a significant portion of value has been explicitly identified and supported.
Sustainability: embedded, not overstated
We have deliberately not hard-wired ESG into the model.
Instead, sustainability is reflected through economically grounded assumptions:
- growth expectations linked to the energy transition
- regulatory support for low-carbon heating
- customer demand for sustainable solutions
This approach avoids overstating value, while still capturing real transition dynamics.
Common pitfalls in SME PPAs
Be wary of the following pitfalls:
- Over-reliance on goodwill
→ insufficient identification of intangible assets - Inconsistent assumptions
→ disconnect between deal model and PPA - Weak documentation
→ particularly around attrition, royalty rates and useful lives
A robust PPA is not just about getting the numbers right — it is about ensuring they are defensible under audit and scrutiny.
In short
The Heatpump BV acquisition appears straightforward.
Yet even in this relatively simple SME case, a disciplined PPA is required to:
- translate a transaction price into underlying value drivers
- support the valuation of intangible assets
- ensure alignment with accounting requirements
- provide a clear and defensible financial representation
Final thought
A purchase price is just a number.
A well-executed PPA explains what that number actually represents — and ensures your financial statements tell the right story.