Jeff Bezos was briefly the world’s richest man. The founder of Amazon achieved this title after Amazon stock jumped $15. However, the stock did end up dropping by 4% a day later, so Bill Gates was able to take back the title. Still, many analysts believe that Bezos will jump past Bill Gates in the upcoming weeks and months.
One of the reasons why Amazon stock surged was because of its recent acquisition of Whole Foods Market. Amazon is getting into the grocery industry as it purchased Whole Foods for more than $13 billion. Whole Foods Market was founded by John Mackey, and it has been an omnipresent fixture in affluent and hipster neighborhoods. Now that Amazon owns the company, this could lead to major changes in the physical and online grocery industries.
Purchase Price Allocation and Intangible Assets
Amazon’s purchase of Whole Foods Market gives us the perfect opportunity to talk about purchase price allocation – one of the services offered by our valuation experts at Appraisal Economics. For accounting purposes, a company will hire a valuation services firm to help them allocate, or assign value to, the various assets that were purchased. Purchase price allocation is also used to recognize goodwill.
For purchase price allocation, there are two types of assets that will be analyzed and valued: tangible and intangible assets. Tangible assets represent physical resources like plant, property, and equipment. Regarding the Whole Foods acquisition, valuation experts would determine the fair market value of the real estate, furniture, fixtures, equipment, and other physical assets as part of their purchase price allocation.
However, this only represents part of the value of a company. Whole Foods Market did not have $13.4 billion worth of stores, equipment, and capital. So why did Amazon pay that much? Because Whole Foods Market is a household name that is recognized by most people in the United States. Brand is one of many assets that fall under the category of intangible assets, and they can significantly increase a company’s value. Here are some other intangible assets that a valuation company may be asked to assess:
- Trademarks
- Patents
- Contracts
- Customer lists
- Royalty agreements
- Licensing agreements
- Power purchase agreements
- Leases
- Franchise agreements
- Internet domains
When one company buys another, it will need to allocate value to the intangible assets, in order to record their purchase price on the opening balance sheet and comply with all financial reporting requirements. You can certainly expect that Amazon will be hiring a valuation firm to allocate Whole Food’s intangible assets to remain in compliance.
If you are in need of purchase price allocation services, involving both tangible and intangible assets for accounting purposes, Appraisal Economics’ team includes financial analysts, engineers, and CPAs with years of experience completing these studies.