Purchase price allocation model
Goodwill, write-ups, deferred tax, stock vs asset deal. Allocate a purchase price across book assets, fair value write-ups and new intangibles, compute the deferred tax liability and goodwill in a stock deal and an asset deal, build the closing balance sheet, and say what the write-ups cost earnings and what a step-up is worth in cash.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: purchase price allocation model.Updated 2 October 2026
Who builds it, and for whatBuilt by bankers and corporate development teams before a deal is signed, to show the board what the balance sheet looks like afterwards and what the write-ups will cost reported earnings; rebuilt by the acquirer’s finance team and its valuation advisers after close, when the allocation is booked; and read by equity analysts for the amortisation that separates reported from adjusted earnings. It is also where the tax structure of a deal is priced: whether a step-up in the tax basis is worth what the seller would want for it.
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||||||||||||
| 2 | Blue cells only. $ millions except per-share figures; shares in millions. Years after close. Both companies are invented. | |||||||||||||||||
| 4 | Year | Unit | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | Y11 | Y12 | Y13 | Y14 | Y15 | |
| 5 | Year after close | # | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |
| 7 | The offer | |||||||||||||||||
| 8 | Offer price per target share ($) | $ | 30.00 | |||||||||||||||
| 9 | Target diluted shares (m) | # | 40 | |||||||||||||||
| 10 | Equity purchase price | $m | 1,200.0 | |||||||||||||||
| 11 | Transaction costs (advisory, legal), expensed at close | $m | 25.0 | |||||||||||||||
| 12 | New acquisition debt raised | $m | 800.0 | |||||||||||||||
| 13 | Acquirer cash used | $m | 200.0 | |||||||||||||||
| 14 | Acquirer share price ($) | $ | 50.00 | |||||||||||||||
| 15 | Acquirer shares before the deal (m) | # | 100 | |||||||||||||||
| 16 | Uses: equity price, target debt refinanced, transaction costs | $m | 1,525.0 | |||||||||||||||
| 17 | New acquirer shares issued for the balance, $m | $m | 525.0 | |||||||||||||||
| 18 | New acquirer shares issued (m) | # | 11 | |||||||||||||||
| 19 | Pro forma shares (m) | # | 110.5 | |||||||||||||||
| 21 | The target at close, book values | |||||||||||||||||
| 22 | Target: cash | $m | 50.0 | |||||||||||||||
| 23 | Target: receivables | $m | 120.0 | |||||||||||||||
| 24 | Target: inventory | $m | 100.0 | |||||||||||||||
| 25 | Target: property, plant and equipment, net | $m | 400.0 | |||||||||||||||
| 26 | Target: intangible assets (internally built ones are never recognised) | $m | - | |||||||||||||||
| 27 | Target: goodwill from its own past acquisitions | $m | 80.0 | |||||||||||||||
| 28 | Target: payables | $m | 90.0 | |||||||||||||||
| 29 | Target: accrued liabilities | $m | 40.0 | |||||||||||||||
| 30 | Target: debt, refinanced at close | $m | 300.0 | |||||||||||||||
| 31 | Target: deferred tax liability | $m | - | |||||||||||||||
| 33 | Fair values and lives | |||||||||||||||||
| 34 | Inventory at fair value | $m | 115.0 | |||||||||||||||
| 35 | Property, plant and equipment at fair value | $m | 480.0 | |||||||||||||||
| 36 | Remaining useful life of the PP&E write-up (years) | # | 8 | |||||||||||||||
| 37 | Customer relationships at fair value | $m | 200.0 | |||||||||||||||
| 38 | Customer relationships: useful life (years) | # | 10 | |||||||||||||||
| 39 | Developed technology at fair value | $m | 120.0 | |||||||||||||||
| 40 | Developed technology: useful life (years) | # | 5 | |||||||||||||||
| 41 | Trade name at fair value (indefinite life: not amortised) | $m | 60.0 | |||||||||||||||
| 43 | Tax | |||||||||||||||||
| 44 | Tax rate | % | 25.0% | |||||||||||||||
| 45 | Tax life of acquired intangibles and goodwill in an asset deal (years) | # | 15 | |||||||||||||||
| 46 | Discount rate for the tax savings | % | 9.0% | |||||||||||||||
| 47 | Seller’s extra tax on an asset sale rather than a share sale | $m | 50.0 | |||||||||||||||
| 48 | Structure shown on the closing balance sheet (1 = stock deal, 2 = asset deal) | # | 1 | |||||||||||||||
| 50 | The acquirer before the deal | |||||||||||||||||
| 51 | Acquirer: cash | $m | 400.0 | |||||||||||||||
| 52 | Acquirer: receivables | $m | 300.0 | |||||||||||||||
| 53 | Acquirer: inventory | $m | 250.0 | |||||||||||||||
| 54 | Acquirer: property, plant and equipment, net | $m | 1,500.0 | |||||||||||||||
| 55 | Acquirer: intangible assets | $m | 200.0 | |||||||||||||||
| 56 | Acquirer: goodwill | $m | 500.0 | |||||||||||||||
| 57 | Acquirer: payables | $m | 250.0 | |||||||||||||||
| 58 | Acquirer: accrued liabilities | $m | 100.0 | |||||||||||||||
| 59 | Acquirer: debt | $m | 1,000.0 | |||||||||||||||
| 60 | Acquirer: deferred tax liability | $m | 80.0 |
Click any cell. The inspector names the line, the schedule it belongs to and what kind of cell it is; blue on cream is an input, black a calculation, green a value from another sheet. Scroll sideways to see every year.
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Purchase price allocation model: the workbook
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What the base case says
- Goodwill, stock deal
- $603.8m
- Goodwill, asset deal
- $485.0m
- Deferred tax liability at close, stock deal
- $118.8m
- After-tax charge to earnings, Y1
- $51.8m
- Charge per pro forma share, Y1
- 0.47
- Present value of the asset deal’s tax savings
- $133.5m
- Value of the step-up after the seller’s extra tax
- $83.5m
Read from the workbook as served, every input at its default. Periods: Y1, Y2, Y3, Y4, Y5, Y6, Y7, Y8, Y9, Y10, Y11, Y12, Y13, Y14, Y15. The figures are invented and move with whatever you type in.
What this model is
What an acquisition does to the target’s balance sheet and to the acquirer’s earnings and taxes afterwards: the price set against book net assets, old goodwill written off, assets restated at fair value, new intangibles recognised, the deferred tax liability on the write-ups, and goodwill as the residual.
A stock deal and an asset deal run side by side. The structure changes the size of goodwill, the deferred tax liability and cash taxes; it does not change the after-tax charge to reported earnings. The model shows all four.
Change the fair values, the lives or the tax rate and watch goodwill, the closing balance sheet, the earnings charge per share and the value of a basis step-up move.
Seats: Investment banking, Private equity, Equity research and hedge funds.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Sources and uses
What the deal costs and who funds it
Assumptions, rows 8–19
Goodwill calculation
From the price to goodwill, through every write-up
Assumptions, rows 34–41 · Allocation, rows 9–20
Deferred taxes in an acquisition
The DTL on write-ups, its unwind, and the step-up
Assumptions, rows 44–47 · Allocation, row 6 · Allocation, row 16 · Allocation, rows 23–25 · Deferred tax, rows 6–9 · Deferred tax, rows 12–20
Closing balance sheet
Acquirer plus target plus adjustments, balanced
Assumptions, rows 22–31 · Assumptions, row 48 · Assumptions, rows 51–60 · Closing, rows 6–12 · Closing, rows 15–21
Purchase accounting
The write-up that amortises
Amortisation, rows 6–10 · Amortisation, rows 13–15
What you should be able to explain
- Why goodwill is a residual: the price less the fair value of everything identifiable, including intangibles the target never carried.
- Why the target’s old goodwill is written off and its equity eliminated, and what replaces them.
- Why a stock deal creates a deferred tax liability on the write-ups, and why that liability makes goodwill bigger.
- What a step-up in tax basis changes (goodwill, deferred tax, cash taxes) and what it does not (the after-tax charge to reported earnings).
- Why goodwill and indefinite-lived intangibles are tested for impairment rather than amortised, and why the deferred tax on a trade name never unwinds.
What a reviewer looks for
- Calculating goodwill against the target’s book equity without writing off its existing goodwill.
- Forgetting the deferred tax liability in a stock deal, which understates goodwill.
- Amortising goodwill or an indefinite-lived trade name.
- Booking a deferred tax liability in an asset deal, where the basis has already stepped up.
- Capitalising transaction costs into goodwill rather than expensing them.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- The target’s intangible assets are recognised at fair value for the first time: a company that built its customer base and technology itself carries neither on its balance sheet, which is why acquired intangibles are usually most of the write-up.
- In a stock deal the write-ups create a deferred tax liability at the tax rate, because the buyer inherits the target’s old tax basis. That liability reduces identifiable net assets and so increases goodwill by the same amount.
- In an asset deal, or a stock deal treated as one by election, the tax basis steps up to fair value: no liability arises at close, goodwill is smaller, and acquired intangibles and goodwill are deducted over the tax life. The PP&E write-up is deducted over its book life here; a real schedule would follow the tax depreciation rules.
- Goodwill and the indefinite-lived trade name are not amortised. Their deferred tax never unwinds through amortisation, which is why the stock deal’s liability ends on the trade name alone.
- Transaction costs are expensed at close and reduce the combined company’s equity. Financing fees are left out to keep the sources and uses on one line.
- The after-tax earnings charge is the same in both structures because total tax expense follows book income: in a stock deal the tax effect is deferred, in an asset deal it is current. The difference is cash.
Build it yourself
The starter workbook
The allocation from book value to goodwill has been cleared, in both columns: book net assets, the old goodwill written off, each write-up, the deferred tax liability on them, the fair value of identifiable net assets and goodwill. Build it so that the Closing sheet balances and the Checks sheet confirms goodwill is the residual in both structures.
Blanks: Goodwill calculation. Free with any account. Compare with the worked model when you are done: download above.
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Understand it, drill it, read the build, then apply it to a real company.
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Vocabulary: Purchase Price Allocation (PPA), Goodwill, Deferred Tax (DTA and DTL), Step-Up in Tax Basis, Identifiable Intangible Assets, Inventory Step-Up, Impairment.
Questions about this model
How is goodwill calculated?
Equity purchase price less the fair value of the identifiable net assets acquired. Start from the target’s book net assets, write off its existing goodwill, add the write-ups to fair value (inventory, PP&E and newly recognised intangibles) and, in a stock deal, deduct the deferred tax liability on them. In the base case the price is $1,200 million, identifiable net assets are $596 million and goodwill is $604 million.
Why is goodwill larger in a stock deal?
Because the buyer inherits the target’s old tax basis, so the write-ups will never be deductible and a deferred tax liability is booked against them at the tax rate. That liability reduces identifiable net assets, and goodwill fills the gap: $119 million more goodwill here, exactly the liability.
Does the deal structure change earnings per share?
No. The book charges on the write-ups are the same, and total tax expense follows book income in both cases: in a stock deal the tax effect is a deferred tax credit, in an asset deal it is a current deduction. What changes is cash. The asset deal’s deductions save $240 million of tax over fifteen years, worth $133 million today at 9%.
What is the step-up worth to the buyer and the seller?
To the buyer, the present value of the tax it saves. To the seller, an asset sale usually costs more tax than a share sale. The difference between the two is what the parties can share by agreeing to an asset deal (or an election that treats a share deal as one) and adjusting the price.
What does it cost?
Nothing to inspect: the whole workbook is on this page. A free account chooses one worked model to keep, and downloads every starter workbook. L3VLUP Pro ($25/month) downloads the whole library and opens every model’s formulas in the inspector.
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