We just acquired a 45 person software development operation in India. I am in the process of allocating the tangible and intangible items against the purchase price. One item I am looking for guidance is what value per engineer should I use to determine that portion of the allocation. Given this is a small acquisition, I am trying to avoid an elaborate and expensive 3rd party analysis. Any recommendations on what others have done?
Purchase price allocations for acquisition?
Answers
This is worth vetting with your auditors, but in a recent acquisition I did that included an assembled workforce, we took the position that the value of the workforce was substantial to us; however SFAS 141 (now FASB ASC Topic 350, Intangibles-Goodwill and Other) specifically stipulates that an assembled workforce shall not be recognized as an intangible asset apart from goodwill. We valued the workforce as a goodwill type asset for reporting purposes. We valued the skilled assemble workforce using a valuation model and applying an appropriate rate of return as of the valuation date on each worker. It was fairly straight forward and supportable to KPMG. Our value was around $1.0M so it was material enough to include in our intangibles separately, but many just roll it into goodwill. So determining how material it is compared to all the assets, tangible & intangible will be a quick first step. Then remember that goodwill and goodwill type assets must be tested for impariment annually, so if you lose some or all of these workers you will have an impariment loss.
Hope that helps!
The following assumes these are highly skilled people that would be challenging to replace, therefore they have significant value to the company. The approach most valuation firms will use to value an assembled workforce (as a component of goodwill) involves 3 steps. First, compute the average salary, bonus and benefits cost per employee (we will call this average amount "A"). Second, estimate the total
The "value" of the assembled workforce is the sum of the training/recruiting cost (cost "B" above) that you would avoid by not having to replace everyone and the lost productivity you would incur while you trained the new people. The lost productivity is calculated as: average cost per employee ("A" above) multiplied by {(1 - productivity % during training) x (number of months to become fully productive / 12 months per year)}
Simple Example:
1. Assume average cost per employee is $95,000 (base salary, bonus, and benefits).
2. Assume cost to recruit, hire and train 45 people is $1,925,000 which includes head hunter fees (30% of salary), possible signing bonuses ($5,000 per person), training, relocation costs (unless you can hire all of these people locally which then would bring into question the real "value" of the assembled workforce if they were so easy to replace).
3. Assume it takes 9 months to become fully productive, and they contribute about 75% to productivity during the 9 months while becoming fully trained and 100% productive.
Lost productivity cost per employee = $95,000 x {(1 - 75%) x (9/12)} = $17,812.50
Total lost productivity for 45 people = 45 x $17,812.50 = $801,562.50
Total Assembled Workforce Fair Value = $1,925,000 recruiting/training cost + $801,562.50 total lost productivity = $2,726,562.50 (which represents a portion of the goodwill inherent in the company with such a skilled labor force already in place)
A valuation expert will have databases and other references to support all of the above amounts. The above example is just the "back of the envelope" calculation.
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