Multi-Asset PPA in a Single Transaction: Emergence of Corporate Goodwill

A Veterinary Partner in the USA acquired 41 veterinary clinics and 3 pet boarding facilities in a single transaction, Aranca navigated complex valuation issues with expertise. They accurately identified and valued intangibles, and goodwill for each location. Additionally, they calculated the residual value, attributing it to corporate goodwill, which represented the premium paid for the entire set of assets. Their thorough approach ensured precise allocation of the purchase price, with consolidated goodwill comprising approximately 97% of the total purchase consideration.

This case study examines a multi-specialty consortium of veterinary clinics, practices, and hospitals providing compassionate animal care and improving the quality of life for veterinary professionals. The acquisition involved 41 veterinary clinics and 3 pet boarding/daycare facilities, aimed to establish a prominent veterinary services platform in the Northeastern U.S. To facilitate the purchase price allocation, the acquirer engaged Aranca, a professional services firm specializing in valuation and research. The case study highlights the challenges faced during the valuation process and the solutions provided by Aranca.

Challenges

• Identification of intangibles: The acquisition involved assets spread across 44 locations, making it difficult to identify unique intangibles for each location.
• Allocation of Purchase Consideration for each location: The exercise required determining the purchase consideration and estimating the individual goodwill for each location. 
  
• Identifying the nature of residual value: The total value of the intangible assets and goodwill for the 44 locations was less than the total purchase price paid by the acquirer for a 100% stake in the target company. This discrepancy arose because the purchase price included an operational premium for acquiring the full set of assets together, making it challenging to determine the exact nature of the residual value (i.e., the excess amount paid beyond the identifiable assets and liabilities).
  

Aranca’s solutions

• Intangibles valuation: Aranca reviewed the transaction’s economics, supporting documents, and materials, and held discussions with management. Aranca also considered the Private Company Council election applicable to the subject company, which excludes the recognition of intangibles from non-compete agreements or customer-related intangibles that cannot be separately sold or licensed. As such, the domain name and trademarks were identified as intangibles and valued using a replacement cost approach for each location.
• Determining individual Purchase Consideration & Goodwill: Aranca determined the value of each location using the Discounted Cash Flow (DCF) method. The weighted average cost of capital used in the DCF was estimated based on the risk profile of the business, stage of operations, and size of each asset/location. This allowed Aranca to determine the purchase consideration for each location and, subsequently, estimate the individual goodwill. 
  
• Residual value determination: Of the total purchase consideration for the 100% stake, Aranca attributed 3% to tangible assets, 0.1% to intangibles, and 72% to individual goodwill. The remaining ~25% was classified as residual value and labeled as corporate goodwill. Generally, goodwill represents the portion of the purchase price that cannot be allocated to identifiable assets or liabilities. This residual value accounts for the future benefits the acquirer expects from these assets and opportunities not evident yet, such as potential growth from future customers or synergy benefits.
  The residual value in this case represents the premium paid by the acquirer for the full set of assets vis-a-vis individual assets. Aranca estimated the consolidated goodwill (individual goodwill + corporate goodwill) for this transaction at ~97% of the total purchase consideration. 

Conclusion

Through its expertise in valuation and research, Aranca assisted the management in accurately determining the value of goodwill as part of the purchase allocation exercise. Aranca’s solutions effectively addressed the challenges of determining individual purchase consideration for each location, estimating location-specific goodwill, and assessing the premium embedded in consolidated goodwill. The comprehensive approach of Aranca provided a detailed understanding of the value of acquired assets and liabilities, helping the client interpret the residual value (location-specific goodwill and corporate goodwill) and ensuring compliance.