Under IFRS 3 and French GAAP, an acquiring company must allocate the purchase price to all identifiable intangible assets acquired: customer relationships, brand, technology/IP, non-compete agreements, and favorable contracts. These intangibles are then amortized over their useful lives (typically 5–15 years for customer relationships, 3–7 years for technology). This amortization charge reduces reported EBITDA after PPA.
The PPA amortization issue is most acute for earnouts. If the earnout metric is defined as 'EBITDA' without specifying whether it is pre- or post-PPA amortization, a dispute arises: the buyer will argue that post-PPA EBITDA (lower) is the correct metric; the seller will argue that pre-PPA EBITDA (higher) should be used. In a €10m acquisition with €3m of intangibles amortized over 10 years, the PPA charge is €300k/year — enough to affect whether an earnout target is hit.
PPA also affects how the business appears to future buyers at exit. A PE fund that acquired the business will show higher amortization charges in the P&L, depressing reported EBITDA — which is then 'added back' as an adjusting item in the normalized EBITDA presented to exit buyers. Sellers being acquired into PE platforms should understand that their reported profitability post-acquisition will show large amortization charges that do not reflect cash economics.
PPA amortization impact
Acquisition: €15m. Net identifiable assets: €3m. Goodwill: €12m. PPA intangibles identified: customer relationships €4m (10-year life = €400k/year amortization), technology €2m (5-year life = €400k/year). Total annual PPA amortization: €800k. Effect on EBITDA: if earnout metric is post-PPA EBITDA, it is €800k lower than pre-PPA. At 9× implied multiple, this represents €7.2m difference in earnout base value.
Frequently asked questions
Is goodwill amortized under IFRS?
No — under IFRS, goodwill is not amortized but tested annually for impairment (IAS 36). Under French GAAP (PCG), goodwill is amortized over a maximum of 10 years (or longer in justified cases). This creates a difference in reported profits between IFRS-reporting and French GAAP-reporting acquirers, which can be significant in earnout calculations.
How can sellers protect themselves from PPA affecting earnout calculations?
The most reliable protection is to define the earnout metric as a pre-PPA, pre-amortization-of-acquisition-intangibles EBITDA — explicitly excluding any amortization charges arising from the acquisition accounting. This requires precise drafting in the SPA and should be reviewed by both the seller's accountant and legal counsel. Alternatively, use an EBITDA + D&A metric (EBITDA before depreciation and amortization = EBITDA) which is naturally insensitive to PPA.
Does PPA affect the tax basis of the acquired assets?
In a share deal (cession de titres), PPA is an accounting allocation only — it does not create a new tax basis for the acquired assets. The acquired company continues to use its pre-acquisition asset tax basis. In an asset deal (cession de fonds de commerce), the buyer acquires assets at their purchase price, creating a new tax basis and enabling higher depreciation deductions — this is one of the buyer-side tax advantages of asset deals.