Module I· Goodwill, Intangibles & ImpairmentIntermediate
Question
How do customer relationships (CR) differ from order backlog in a PPA?
Answer
Mechanics
Customer relationships (CR) and order backlog are both customer-related intangibles, but they are defined and valued differently:
| Intangible | Content | Valuation method | Useful life |
|---|---|---|---|
| Customer relationships | The value of the recurring-customer relationship; based on expected RECURRING revenue | Multi-period excess earnings method (MEEM): customer cash flows × retention rate, less contributory asset charges, discounted | 5–15 years (depends on customer attrition) |
| Order backlog | The value of SPECIFIC, ALREADY-SIGNED orders at closing | DCF on the specific order margins | Remaining term of the orders (typically 1–3 years) |
Deep diveShow more details
Example — Global Chemicals Corp is acquired
The PPA identifies:
- Customer relationships: $30m, 10-year life → amortization $3m p.a.
- Order backlog: $5m, 2-year life → amortization $2.5m p.a.
Later years
the order backlog burns off fast — the first 2 years after closing show both CR and order-backlog amortization (together $5.5m); after that only the CR amortization ($3m) continues.
Pitch tip
'PPA year-1 amortization burden of $5.5m on EBIT, $3.0m from year 3 onward — the reported EBIT margin in year 1 looks 50 bps lower than steady state'.