Lets say we have a PE firm that is to acquire a firm that is 100% management owned. The PE firm acquires 80% at closing and then acquires the additional 20% provided some targets are met (in other words an earn-out). My questions are:
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In the equity section of the balance sheet, do we report the remaining 20% (e.g. as non-controlling interest) or only the PE firms invested equity for 80% (assuming no management roll-over)? Why do we not reflect the 20% in the equity section
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Connected to the above question: when we model an earn-out, we typically add the deferred consideration as a liability and remove it once the deferred purchase price has been paid (decrease in cash balances decrease in liability assuming we fund it with cash). So I guess this means that we do not reflect the 20% stake still owned by management in the equity? Otherwise the adjustments would not balance
Yea you're exactly right, the outstanding earnout value is carried as a liability and reduced appropriately as its paid out.
Yes but how come we do not reflect the 20% ownership of management in the equity section?
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