Fair Value in M&A: Case of [Company A]–[Company B] 2026

Fair value measurement in M&A matters because the numbers recorded at close drive post-merger earnings, tax allocations, and impairment tests for years. In my opinion, this is where the rubber meets the road on deal value and buyer risk.

Fair valuee measurement follows ASC 820, and in an M&A setting it appears in purchase price allocation (PPA). The acquirer takes the deal price and allocates it to identifiable assets and liabilities, with any leftover as goodwill. Market participant assumptions drive the inputs, not internal expectations or marketing pitches. Level 1 prices in active markets drive the clearest inputs, Level 2 covers observable inputs, and Level 3 models inputs such as discounted cash flows when observable data isn’t available. I understand that it’s tempting to lean on internal projections, but GAAP requires market-based inputs where possible.

Current environment and key data points

Two recent data points frame the current environment. First, public strategics show EV/EBITDA multiples around 8.6x, private strategics around 9.8x, and sponsor deals around 12.0x through Q3 2025. These benchmarks shape the fair value allocations and goodwill testing required post-close.

Second, regulatory scrutiny is rising. GAAP requires fair value assessments for tangible and intangible assets, and the SEC/IRS teams are tightening oversight, especially on tech and healthcare deals where IP and data have high value implications.

Recent realizations in fair value practice

In the last six months, fair value practice has adjusted to a few clear realities. Valuation gaps between buyers and sellers narrow, making earn-outs and rollover equity more common. That trend matters for fair value because it shifts contingent considerations into more explicit GAAP inputs. The rate environment matters too; higher risk-free rates feed into discount rate assumptions for Level 3 inputs (Unobservable valuation inputs used in discounted cash flow models) when cash flows are uncertain. And sponsors pay higher upfront multiples than strategics, which affects the initial fair value of goodwill and tax amortization.

Case study setup: a practical walkthrough

Now, a practical case study. I’ll walk through a real-world-like example using two well-known companies that underwent M&A activity, and map how fair value measurement would have looked in the PPA stage if the deal occurred in 2025-2026 under today’s rules. The goal is to show the mechanics, not to rehash the deal narrative.

Case study: Microsoft’s hypothetical acquisition of a large cloud security platform (imagined for 2025-2026)

Case study: Microsoft’s hypothetical acquisition of a large cloud security platform (imagined for 2025-2026 timing), anchored to a real-world example. Microsoft has pursued cloud and security acquisitions, but this example uses a plausible, sizable target in that space. The deal value sits at $6.5B enterprise value. The buyer’s price allocation would typically allocate across:

• Identifiable intangible assets: technology (IP, software code), customer relationships, and backlog. Tech intangibles are measured at fair value of $3.0B and customer relationships at $1.1B.
• Tangible assets and goodwill: tangible assets at $0.4B, liabilities assumed at $0.2B, with the remainder as goodwill.

If total identifiable net assets sum to $4.3B, the $6.5B purchase price leaves $2.2B for goodwill.

• Contingent consideration: if the deal includes earn-outs tied to GAAP EBITDA targets, those are fair-valued at closing. Suppose earn-outs are estimated at $0.3B, recognized as a separate liability and measured at fair value at the acquisition date.

Inputs under ASC 820 lean on Level 1 and Level 2 data for the IP and customer assets (noting market-based royalties, replacement costs, and comparable IP licenses where available). Where inputs are not observable, Level 3 cash-flow models apply. The discount rate for Level 3 inputs might use a weighted-average cost of capital reflective of the combined entity and jurisdiction risk, plus a liquidity adjustment for the target.

Important point: the allocation drives post-close depreciation and amortization, which changes reported EBITDA and tax expense. If the fair value of the tech IP is $3.0B, you’ll amortize that over the estimated useful life, say 10 years, producing about $0.3B of annual amortization. That reduces annual pretax income and affects cash taxes. It also changes impairment testing triggers later, since goodwill remains measured at its fair value and is tested annually or when impairment indicators exist.

In this frame, you also consider regulatory overlays. Tech targets bring CFIUS scrutiny risk, so you document national security implications as part of the valuation narrative. That diligence affects the fair value and may introduce conditions into the deal structure, like retention provisions or escrow accounts to support post-close integration risk.

The case shows why fair value measurement isn’t a back-office task. It is the lens through which you understand post-close earnings, tax position, and capital allocation. It informs whether the deal creates value or not, and how you monitor that value over integration.

Four practices to keep fair value work tight and defensible

From my experience, four practices keep fair value work tight and defensible:

• Use market-based inputs wherever possible. Avoid overreliance on internal projections when Level 1 and Level 2 data exist.
• Document earn-outs and contingent considerations clearly. Value them at closing and adjust with GAAP-based verification rights if the deal includes GAAP targets.
• Align discount rates with observable market data for cost of capital, and separate GAAP impairment considerations from tax considerations where needed.
• Prepare a robust impairment testing plan early. Once you close, you want to avoid surprise write-downs by ensuring models reflect the most current market inputs and integration milestones.

Recent 2025-2026 trends reiterate the value of disciplined valuation. Capstone Partners notes ongoing PE dominance lifting multiples; EY and Deloitte highlight optimistic deal flow for 2026, with 80-90% of leaders expecting more deals. Dealroom shows sector-specific dynamics, with tech and healthcare driving much of the activity. In practice, fair value work becomes a matter of constant updating: new market data, new regulatory expectations, and new structuring techniques like joint ventures and seller financing that change how you frame fair value.

Practical notes you can apply now

• In PPA, lock in the most defensible Level 1 and Level 2 inputs for assets and liabilities, and reserve Level 3 modeling strictly for non-observable items with explicit disclosures.
• Prepare a rolling fair value documentation packet for annual impairment tests, including sensitivity analyses around key inputs like discount rates and cash-flow projections.
• Anticipate earn-out mechanics in your fair value estimates and ensure verification rights are clear, so you can model realistic revenue and EBITDA milestones without overstatement.
• Regulatory reviews shape closing mechanics and ongoing reporting; prepare for robust disclosures and cross-functional alignment between accounting, tax, and regulatory teams.

If you want more on this topic, keep reading Matactic’s glossary and case studies on fair value, and sign up for our free M&A course. I’ve seen how this stuff plays out in real deals, and you’ll get practical, battleground-tested guidance you can apply in your next PPA. In my opinion, staying current on these standards saves you from big surprises after close. Trust me, it helps your team move faster and with less risk. Not gonna lie, that’s what I aim for in every deal.

For more terms and real-world examples, explore Matactic’s glossary and join our free M&A course to deepen your understanding of fair value measurement and post-close valuation dynamics.