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.
Built in: Investment banking, Private equity, Equity research and hedge funds
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.
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| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||||||||||||
| 2 | $m unless stated. Columns Y1 to Y15 are years after close. | |||||||||||||||||
| 4 | Year | Unit | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | Y11 | Y12 | Y13 | Y14 | Y15 | |
| 5 | Year after close | year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |
| 7 | Transaction assumptions | |||||||||||||||||
| 8 | Offer price per target share | $ per share | 30.00 | |||||||||||||||
| 9 | Target diluted shares | m shares | 40 | |||||||||||||||
| 10 | Equity purchase price | $m | 1,200.0 | Purchase consideration: offer price x target diluted shares | ||||||||||||||
| 11 | Transaction costs | $m | 25.0 | Advisory and legal. Expensed at close; not part of consideration. | ||||||||||||||
| 12 | New acquisition debt | $m | 800.0 | Funding source | ||||||||||||||
| 13 | Acquirer cash used | $m | 200.0 | Funding source | ||||||||||||||
| 14 | Acquirer share price (illustrative input) | $ per share | 50.00 | Issue price of the new shares | ||||||||||||||
| 15 | Acquirer shares before the deal | m shares | 100 | |||||||||||||||
| 16 | Total uses (funding requirement) | $m | 1,525.0 | Equity purchase price + target debt refinanced + transaction costs | ||||||||||||||
| 17 | Value of new acquirer shares issued | $m | 525.0 | Balancing funding source: total uses - new debt - acquirer cash | ||||||||||||||
| 18 | Number of new acquirer shares issued | m shares | 10.5 | Value of shares issued / acquirer share price | ||||||||||||||
| 19 | Pro forma shares outstanding | m shares | 110.5 | |||||||||||||||
| 21 | Target balance sheet at acquisition | |||||||||||||||||
| 22 | Target: cash | $m | 50.0 | Book values at close | ||||||||||||||
| 23 | Target: receivables | $m | 120.0 | |||||||||||||||
| 24 | Target: inventory | $m | 100.0 | |||||||||||||||
| 25 | Target: property, plant and equipment (PP&E), net | $m | 400.0 | |||||||||||||||
| 26 | Target: intangible assets | $m | - | Assumed nil: the target carries no intangible assets before the deal. | ||||||||||||||
| 27 | Target: existing goodwill | $m | 80.0 | From the target’s past acquisitions. Written off in the allocation. | ||||||||||||||
| 28 | Target: payables | $m | 90.0 | |||||||||||||||
| 29 | Target: accrued liabilities | $m | 40.0 | |||||||||||||||
| 30 | Target: debt | $m | 300.0 | Refinanced at close | ||||||||||||||
| 31 | Target: deferred tax liability | $m | - | |||||||||||||||
| 33 | Fair values and useful lives | |||||||||||||||||
| 34 | Inventory, fair value | $m | 115.0 | |||||||||||||||
| 35 | PP&E, fair value | $m | 480.0 | |||||||||||||||
| 36 | PP&E write-up, remaining useful life | years | 8 | |||||||||||||||
| 37 | Customer relationships, fair value | $m | 200.0 | |||||||||||||||
| 38 | Customer relationships, useful life | years | 10 | |||||||||||||||
| 39 | Developed technology, fair value | $m | 120.0 | |||||||||||||||
| 40 | Developed technology, useful life | years | 5 | |||||||||||||||
| 41 | Trade name, fair value | $m | 60.0 | Indefinite life: not amortised | ||||||||||||||
| 43 | Tax | |||||||||||||||||
| 44 | Tax rate | % | 25.0% | |||||||||||||||
| 45 | Tax amortisation period, asset deal | years | 15 | Acquired intangibles and goodwill, straight line | ||||||||||||||
| 46 | Discount rate for tax savings | % | 9.0% | Annual | ||||||||||||||
| 47 | Seller’s incremental tax on an asset sale | $m | 50.0 | Extra tax compared with a share sale | ||||||||||||||
| 48 | Structure on Closing sheet | # | 1 | 1 = stock deal (share acquisition), 2 = asset deal | ||||||||||||||
| 50 | Acquirer balance sheet before the deal | |||||||||||||||||
| 51 | Acquirer: cash | $m | 400.0 | |||||||||||||||
| 52 | Acquirer: receivables | $m | 300.0 | |||||||||||||||
| 53 | Acquirer: inventory | $m | 250.0 | |||||||||||||||
| 54 | Acquirer: PP&E, 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 | |||||||||||||||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
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Purchase price allocation model: the workbook
Excel workbook with working formulas, no macros and no external links. Work with it above first; it is the same model as the preview.
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
- After-tax charge per pro forma share, Y1
- 0.47
- Present value of asset deal tax savings
- $133.5m
- Net value of step-up after seller’s 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
A purchase price allocation for one acquisition: the equity purchase price set against the target’s book net assets, existing goodwill written off, assets restated at fair value, identifiable intangibles recognised, the deferred tax liability on the write-ups, and goodwill as the residual.
A stock deal (share acquisition) and an asset deal run side by side. The structure changes goodwill, the deferred tax liability and cash taxes, but not the after-tax charge to reported earnings.
Uses: building a closing balance sheet, estimating what the write-ups cost earnings per share, and valuing a step-up in tax basis.
Seats: Investment banking, Private equity, Equity research and hedge funds.
Careers that do this work: investment banking, private equity, growth equity, corp dev / m&a, venture capital.
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.
- In this model the target carries no intangible assets before the deal, so customer relationships, developed technology and the trade name are recognised for the first time, at fair value.
- Stock deal: the acquirer inherits the target’s tax basis. The write-ups create a deferred tax liability at the tax rate, which reduces identifiable net assets and increases goodwill by the same amount.
- Asset deal, or a share acquisition treated as one by tax election: the tax basis steps up to fair value. No deferred tax liability arises at close, goodwill is smaller, and acquired intangibles and goodwill are deducted for tax over the tax amortisation period. The PP&E write-up is deducted over its book life as a simplification; actual tax depreciation rules are not modelled.
- Goodwill and the indefinite-lived trade name are not amortised. Their deferred tax does not unwind, so the stock deal liability ends at the trade name x tax rate.
- Purchase consideration is the equity purchase price. Transaction costs are expensed at close and reduce combined equity; they are not part of consideration. Financing fees are not modelled.
- Funding: new debt and acquirer cash are inputs, and new acquirer shares fund the rest of total uses (equity purchase price, target debt refinanced and transaction costs).
- The after-tax earnings charge is the same in both structures because tax expense follows book income: the tax effect is deferred in a stock deal and current in an asset deal. The difference is cash tax.
- On the Closing sheet, acquirer and target equity are the balancing figures of their book balance sheets.
Build it yourself
The starter workbook
The allocation from book net assets to goodwill has been cleared in both columns. Rebuild target book net assets, the existing goodwill written off, each write-up, the deferred tax liability, the fair value of identifiable net assets and goodwill. The Checks sheet shows when goodwill is the residual in both structures and the Closing sheet balances.
Blanks: Goodwill calculation. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Understand · Primer
Accounting for Finance Interviews
Intro · a curated reel with a quiz
Build · Lab · ~8 min
Accretion / Dilution Animator
Call a deal accretive or dilutive from P/E, premium and financing mix before you open a model.
Read · Guide · 12 min
How to Build a Merger Model: Purchase Accounting, Financing and Accretion
Read · Guide · 8 min
M&A Interview Questions: Accretion/Dilution and Beyond
Read · Guide · 10 min
Top Investment Banking Technical Questions (With Answer Frameworks)
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
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 preview: the whole workbook is on this page, and a free account works with it online, every formula included. Every starter workbook downloads with a free account. L3VLUP Plus ($4.99/month) keeps one worked model each billing month, yours for good, and L3VLUP Pro ($25/month) keeps every one.
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