LBO Modeling - Transaction Fees?
Quick question if someone can please help. In an LBO scenario, transaction Fees are expensed on the B/S (coming out of Shareholder's Equity) but does that mean they reflected on the Income Statement as well (as a one-time charge in Year 1)?
No, transaction fees aren't "paid" by the operating company and they certainly aren't a cost related to doing business. Although you're technically correct that transaction fees are taken out of SE in an LBO model, they conceptually aren't "taken out" of anything.
I'm assuming the reason why you think they are debited from SE is because the B/S adjustment you make when building a PF B/S is adding the sponsor equity less the transaction costs and existing SE. But the reason you subtract the transaction fees from sponsor equity is because the sponsor didn't actually pay that much for the company. The operating company doesn't ever see the proceeds (it's not as if the opco is paid the total sponsor equity then charged the transaction fees), and so from their perspective, they have valued their book assets at [ sponsor equity - transaction fees ], which represents the new book value of assets.
Currently working thru a case LBO...so you're saying that the reason you debit the transaction fee is because the sponsor isn't actually putting that money into the company? So in the model, if it shows that the sponsor puts in $500mm, and the transaction fees are $20mm, then they are actually only putting in $480mm of actual equity?
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