Can You Skip Part of a Purchase Price Allocation? Yes, but the Decision Is Bigger Than the Deal.
Can You Skip Part of a Purchase Price Allocation? Yes, but the Decision Is Bigger Than the Deal.
September 15, 2026
Why the Private Company Election Reaches Every Dollar of Goodwill You Carry
Last month we walked through the purchase price allocation, the exercise that takes one price paid for a business and assigns it across the assets and liabilities acquired, each measured at fair value, meaning what a market participant would pay rather than what this buyer had in mind, with whatever remains recorded as goodwill. That issue closed on a caveat. Eligible private companies can elect accounting alternatives that change part of that work, offered through the Private Company Council (“PCC”), a body that develops alternatives within generally accepted accounting principles (“GAAP”) for companies that are not public. Those elections are the subject here.
The appeal is easy to see. One of the elections lets a buyer stop separately valuing certain customer intangibles and every noncompete agreement it acquires. But the election does not come on its own. It comes attached to a second election that changes the accounting for all of the company's goodwill, on every acquisition, past and future. The two are not separate decisions. They run in one direction.
Eligibility comes first. The alternatives are open to private companies and not for profit entities, and closed to any company that meets the accounting definition of a public business entity, which reaches well past "listed on an exchange." Employee benefit plans are outside the scope as well. Eligibility is a status rather than a choice, and a company that qualifies today may not qualify after its next round of financing or its next sale.
How the Two Elections Work
There are two elections in play. The first is the goodwill amortization alternative. It lets a company amortize goodwill, writing it off against earnings in equal amounts each year, over no more than ten years. Ten is both the default and the ceiling. A company can take the full ten without justifying the choice, or a shorter life if the facts support one, but never a longer one. None of that happens unless the company makes the election. Absent one, goodwill sits on the balance sheet, and once a year the company tests it for impairment, asking whether it is still worth what the books say, whether or not anything has gone wrong.
That annual test is why the election exists. It costs real money every year, and when the PCC looked into it, the people who actually read private company financial statements, lenders most of all, reported that they largely set goodwill and goodwill writedowns aside in their analysis. So the election replaces a yearly valuation exercise with a predictable charge against earnings, and impairment is tested only when something happens to suggest a problem.
The second is the intangible asset alternative. Elect it and two things stop getting valued separately: noncompete agreements, all of them, and customer relationships, generally the ones that cannot be sold or licensed on their own. Their value is subsumed into goodwill. Nothing is measured separately, and the amount lands in the residual. That is all the election covers. Everything else acquired still gets identified and measured at fair value.
| Acquired in a business combination | Default rules | Both alternatives elected |
|---|---|---|
| Noncompete agreementsAll of them, with no separability test | Recognized separately at fair value | Subsumed into goodwill |
| Customer relationshipsResting on expected future business; typically cannot be sold or licensed on their own | Recognized separately at fair value | Subsumed into goodwill |
| Customer lists, supply contracts, core deposit relationshipsCapable of being sold or licensed on their own | Recognized separately at fair value | Unchanged, still recognized |
| Order backlogItself a customer intangible, so it takes the same test | Recognized separately at fair value | Subsumed only if it cannot be sold or licensed |
| Trade name, developed technology, every other identifiable intangible | Recognized separately at fair value | Unchanged, still recognized |
| Goodwill | Not amortized; tested for impairment at least annually | Amortized over a period not to exceed ten years |
A buyer that wants to stop valuing customer relationships and noncompetes has to elect goodwill amortization as well. Goodwill amortization can be elected on its own. The intangible asset alternative cannot.
That chain is deliberate. Customer relationships and noncompetes have finite lives, meaning they are used up over time rather than lasting indefinitely. Subsume them into goodwill, and if goodwill never amortizes, those assets sit on the balance sheet indefinitely and never reach earnings at all. The PCC and the Financial Accounting Standards Board (“FASB”) concluded it would not be appropriate to include assets with finite lives in goodwill unless goodwill is amortized as well.
Once made, goodwill amortization applies to all of the company's goodwill, existing and new, so a buyer cannot take it for this acquisition and leave the last one alone. The intangible asset election runs only forward. It applies to acquisitions made after the election, and intangibles already on the books stay there.
Key concept: these are not two independent elections. The intangible asset alternative may be elected only by a company that also elects goodwill amortization. The simplification a buyer wants for one deal arrives attached to a change in how it accounts for every dollar of goodwill on its balance sheet, from every acquisition it has ever made.
Where Valuation Comes In
The election can simplify the valuation, but it does not remove the need for one. The trade name is still measured at fair value. So is any customer intangible capable of being sold or licensed on its own, and deciding which assets those are is itself a judgment that needs support rather than an assumption. Every tangible asset acquired and liability assumed is still measured. Goodwill is still the residual. Anything measured loosely lands in the goodwill figure.
The election also changes reported earnings, and the size of that change is worth working out before the choice gets made. Goodwill amortization is a real charge. Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is generally untouched, since it excludes amortization by definition. Net income, operating income, and retained earnings are not, which matters to a company whose debt covenants are tied to those measures. Whether the simplification is worth the charge is a business decision, and one a buyer is better off making with its accountant and its valuation professional in the same conversation.
These elections are open only to companies that are not public. A company that elects and later stops qualifying, by being acquired by a public buyer for instance, may have to reallocate the purchase price and recast the prior years as though it had never elected. That is not a bookkeeping exercise. It means appraising the customer relationships and the noncompete that were never valued the first time, as of an acquisition date now years in the past, and supporting those values to the standard they would have had to meet at the time.
A Hypothetical Example
Assume Ostrander Industrial, a closely held manufacturer, acquires Kellerman Pump Works for $20.0 million in cash. Ostrander reports under GAAP because its lender requires audited financial statements, it is not a public business entity, and it already carries $5.0 million of goodwill from an acquisition it closed three years ago. Curtis Bellinger, Ostrander's CFO, has been through that first allocation and asks whether there is a different approach available for this one. He wants to know whether Ostrander can elect the intangible asset alternative and subsume the customer relationships and the founder's noncompete into goodwill. He can, provided Ostrander also elects goodwill amortization. In very simple terms:
| Default rules | Alternatives elected | |
|---|---|---|
| Tangible net assetsWorking capital and equipment, net of assumed liabilities | $6.0M | $6.0M |
| Trade nameNot covered by the alternative; measured either way | 1.5 | 1.5 |
| Customer relationshipsCannot be sold or licensed on their own, so the alternative subsumes them | 4.0 | None |
| NoncompeteSigned by Kellerman's founder; every noncompete is subsumed | 0.5 | None |
| Goodwill, the residual | 8.0 | 12.5 |
| Consideration transferred | $20.0M | $20.0M |
| Annual amortization that follows | ||
| Customer relationships$4.0M over ten years; subsumed, so nothing to amortize on its own | 0.4 | None |
| Noncompete$0.5M over its five year term | 0.1 | None |
| Goodwill from this deal$12.5M over ten years; not amortized under the default rules | None | 1.25 |
| Goodwill from the earlier acquisition$5.0M over ten years; the election reaches it too | None | 0.50 |
| Annual charge against earnings | $0.5M | $1.75M |
Both columns tie to $20.0 million. The price did not change. The $4.5 million of customer relationships and noncompete stays inside goodwill rather than standing on its own, and the election taken to avoid valuing it more than triples Ostrander's annual charge against earnings.
Curtis was looking for a way to save Ostrander a valuation. The election saves part of one. The trade name still has to be measured, and whether the customer relationships could be sold or licensed on their own still has to be answered before anything is subsumed. That may still be the right answer for Ostrander.
Signs the Election Deserves a Closer Look
- You carry goodwill from earlier acquisitions and are weighing the intangible asset alternative for a new one.
- Your debt covenants are measured on net income, operating income, or net worth rather than on EBITDA.
- You pay for a goodwill impairment test every year, and nobody who reads your financial statements has ever asked about the result.
- You assumed that electing the intangible asset alternative means your next acquisition needs no valuation work at all.
- You have elected, or are close to electing, and there is any realistic chance the company gets acquired by a public buyer.
At Eubank Capital, we prepare purchase price allocations for closely held buyers and their audit teams, including buyers weighing the private company alternatives. We measure the assets the election still reaches, work through whether a customer intangible can be sold or licensed on its own, model what goodwill amortization would do to earnings across all of a company's goodwill rather than only the newest deal, and, where an election has to be unwound, value the intangibles subsumed into goodwill as of the dates that apply. The goal is an election made with the arithmetic in front of you rather than discovered later.
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This article is provided for general informational purposes only and does not constitute accounting, legal, tax, or valuation advice. Any purchase price allocation, eligibility determination for the private company accounting alternatives, election of the goodwill amortization or intangible asset alternatives, identification and measurement of acquired intangible assets, and related financial reporting analysis should be reviewed and implemented by qualified accounting, legal, and tax advisors based on the reader’s specific facts and circumstances. The individuals and companies in the examples are fictitious, and any resemblance to real persons or businesses is purely coincidental.