2.7 Related Businesses

This Roadmap does not reflect updates to the FRM made after May 2025. See Preface for details.

Rule 3-05 requires registrants to treat the acquisition or probable acquisition of a group of related businesses (related acquirees) as a single business acquisition.

2.7.1 Definition of Related Businesses

Under Rule 3-05(a)(3)(i)–(iii), businesses are related if any of the following conditions apply:

“They are under common control or management.”
“The acquisition of one business is conditional on the acquisition of each other business.”
“Each acquisition is conditioned on a single common event.”

2.7.1.1 “Under Common Control or Management”

While common control is defined in U.S. GAAP (see Section B.2 in Deloitte’s Roadmap Business Combinations for guidance on when common control exists), “common management” is not. The presence of common management therefore depends on the relevant facts and circumstances.

Example 2-26

Registrant A acquires Companies X and Y when both companies are wholly owned by Private Equity Investor E. Companies X and Y are deemed to be related businesses for SEC reporting purposes because they were under common control immediately before A acquired them.

Example 2-27

Companies E and F share the same members of their respective boards of directors and the same top five management executives when both companies are acquired by Registrant T. Companies E and F are deemed to be related businesses for SEC reporting purposes because they had common management immediately before T acquired them.

2.7.1.2 “Acquisition of One Business Is Conditional on the Acquisition of Each Other Business”

Example 2-28

Registrant A agrees to acquire Company B. However, the purchase agreement between A and B states that A will not consummate the acquisition of B unless it is also able to consummate the acquisition of Company X. Companies B and X are not under common control and do not have any common management immediately before A acquires them.

Registrant A consummates the acquisition of X and also consummates the acquisition of B. Companies B and X are deemed to be related businesses for SEC reporting purposes because the acquisition of B and X was “conditional on the acquisition of each other.”

2.7.1.3 “Each Acquisition Is Conditioned on a Single Common Event”

Example 2-29

Registrant A agrees to acquire Companies H and J. However, the purchase agreements between A and H and between A and J state that A will not consummate the acquisitions unless A is able to raise $10 million via a public offering of its common stock.

Registrant A completes the public offering and then consummates the acquisitions of H and J. Companies H and J are deemed to be related businesses for SEC reporting purposes because each acquisition was “conditioned on a single common event.”

2.7.2 Performing the Significance Tests for Related Businesses and Other SEC Reporting Considerations

Once a registrant determines that a group of acquirees is related, it is required under Rule 3-05(a)(3) to assess their significance by comparing their preacquisition annual financial statements, on an aggregate basis, to the registrant’s annual financial statements. Aggregating such financial statements is required; it is not optional. When evaluating significance, registrants must take into account all related business acquisitions that are probable or have occurred after the latest fiscal year-end for which their audited financial statements have been filed. If related businesses have different fiscal year-ends, the registrant should not conform such year-ends when performing the significance tests. In addition, a registrant that acquires multiple related businesses over the course of a year must aggregate the financial information of all related businesses as of each acquisition date to perform the tests of significance for each acquisition.

The significance thresholds and respective financial statement presentation requirements that apply to individual acquirees (see Section 2.3) are the same as those that apply to the aggregated related businesses. If any of the results of the significance tests for the group of related businesses exceed 20 percent, the registrant must present financial statements for all of the related businesses, even if a related business is individually insignificant. If, because of the cumulative significance of the related businesses, a Form 8-K must be filed, financial statements are required for all consummated related business that have not been previously filed.

Similarly, the types of filings for which the financial statements of related businesses are required are the same as those for which the financial statements of individually significant acquirees are required (see Section 2.4). For example, the registrant may be required to include the financial statements of acquired related businesses in a registration statement, prospectus supplement, proxy statements, or Form 8-K if such businesses are significant. In addition, if the acquisition of related businesses is probable and significant, the registrant may have to include the financial statements of such businesses in a registration statement, prospectus supplement, or proxy statement. Financial statements of significant acquired or to be acquired related businesses are not required in annual or quarterly reports filed on Form 10-K or 10-Q.

If the financial statements of related businesses are required, a registrant may combine them if the businesses are under common control or management and they meet the criteria for combination in ASC 810-10-55-1B. However, the SEC staff may require the combined financial statements of acquired related businesses to be presented separately from the combined financial statements of related businesses that are to be acquired. If related businesses were under common control or management for only a portion of the required periods, a registrant must present separate financial statements for each related business for such portion during which the related businesses were not under common control or management.

Under Rule 3-13, the SEC staff may consider a registrant’s request to waive the financial statements of individual related businesses that are not significant to the overall transaction. For additional guidance on Rule 3-13 waivers and prefiling letter requests, see Section 2.5 of Deloitte’s Roadmap Initial Public Offerings.

2.7.2.1 Investment and Asset Tests

The investment and asset tests should be performed individually for each related business, and the significance of such businesses will be determined on the basis of the sum of each result. In many cases, the acquisition of related businesses may be announced or agreed to on the same date. If, however, they are announced or agreed to on different dates, a registrant may use a different AWMV (if applicable) for each related business acquisition when performing the investment test. See Sections 2.3.2 and 2.3.3 for broader discussions of the investment and asset tests, respectively.

2.7.2.2 Income Test

For both the income and revenue component of the income test, a registrant should treat related businesses as a single business acquisition:

Income component — A registrant aggregates pretax income or loss from continuing operations for all related acquired or to be acquired businesses. (Such treatment differs from the evaluation of individually insignificant acquirees, as discussed in Section 2.9.) That is, the individual businesses do not need to be separated on the basis of whether they reported income or loss.
Revenue component — If both the registrant and the related businesses, as a group, have material revenues in each of the two most recently completed fiscal years, the combined revenue for the group of related businesses should be used for the revenue component of the income test. If either the registrant or the related businesses, as a group, did not have material revenue for the two most recently completed fiscal years, only the income component should be used in the test. In such cases, a registrant may be able to use its five-year average of pretax income for the income component when the revenue component is not applicable (see Section 2.3.4 for additional information). In certain situations, it may be appropriate for the registrant to use pro forma financial information filed for a previous significant acquisition when performing the significance tests for the related businesses (see Section 2.3.1.2 for additional information).

Example 2-30

Registrant A announced the planned acquisitions of Companies B, C, and D on March 31, 20X4; April 30, 20X4; and May 30, 20X4, respectively. On July 31, 20X4, A consummated the acquisitions of B, C, and D, which were deemed related businesses because they were under common control since January 1, 20X1. Registrant A and Companies B, C, and D all have a December 31 year-end.

The table below summarizes the financial information of A, B, C, and D as of and for the year ended December 31, 20X3, as well as the calculation of the combined significance of B, C, and D. Assume that A, B, and C had material revenues for each of the two most recent fiscal years, but D did not.

On the basis of the results of the investment test, B, C, and D were determined, in the aggregate, to be 38 percent significant to A. While the income component of the income test exceeds 40 percent, the revenue component does not. The revenue component of the income test applies because the related businesses as a group had material revenue for each of the two most recent fiscal years even though D did not have material revenues on a stand-alone basis.

Registrant A filed a Form 8-K announcing the consummation of the acquisitions on August 3, 20X4 (i.e., within four business days). On the basis of significance level, A must file an amended Form 8-K before October 13, 20X4 (i.e., 71 calendar days after it was required to file the initial Form 8-K), as well as the required pro forma financial information. In addition, in the amended Form 8-K, A must present B’s, C’s, and D’s (1) audited financial statements as of and for the year ended December 31, 20X3, and (2) unaudited balance sheet as of March 31, 20X4, and unaudited statements of operations, comprehensive income, cash flows, and changes in stockholders’ equity for the quarter ended March 31, 20X4. However, A may present combined financial statements of B, C, and D because those companies meet the combining criteria under ASC 810-10-55-1B. Depending on when it files future registration statements, A may need to update the interim acquiree financial statements presented (see Section 2.5.4.3).

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.