cash free / debt free basis
When acquiring private companies, why are buyers asked to bid assuming the target is both cash and debt free?
What is the rationale behind this?
When acquiring private companies, why are buyers asked to bid assuming the target is both cash and debt free?
What is the rationale behind this?
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For debt free, especially for smaller companies/deals, debt is considered a sunk cost and has (shouldn't I should say) effect on future earnings potential for the company, and shouldn't have bearing on your cash forward valuation. It's trying to get the buyer to look at the targets revenue generation potential instead of the standing debt, accounts payable, notes etc.
"Cowards die a thousand deaths, but the brave only one," Bill Shakespeare
Thanks, but is a "cash free / debt free" transaction equal to a target's enterprise value or equity value?
If a company has say $4 million of equity, $2 million of debt, and $1 million of cash, would a bid based on a cash free / debt free basis be $4 million (i.e., equity value) or $5 million (i.e., enterprise value)?
For a public firm, the purchase price equals the equity value plus a control premium.
I am not sure how it is for a private firm.
Some help... please?
Oh sorry man, for a private its definitely not that easy (purchase price equals the equity value plus a control premium). Your enterprise value for the private company your targeting is:
Enterprise value = common equity at equity value + debt at market value + minority interest at market value, if any - associate company at market value, if any + preferred equity at market value - cash and cash-equivalents.
Here's a pretty good article on valuing companies where you don't have access to the companies financials. http://www.developmentcorporate.com/2009/03/07/how-to-calculate-the-ent…
"Cowards die a thousand deaths, but the brave only one," Bill Shakespeare
westfald has no idea what he's talking about...
you calculate it on a debt free / cash free basis as most private companies can 1) take out the cash as a special dividend (most common in LBO and strategic acquisitions) at closing and 2) because most debt has change of control clauses which force automatic repayment... assuming you bring in your own debt, you don't care what else the other guy already has, you want a PF balance sheet to target in order to run your financials from (not including the debt and cash of the old company)...
Mezz, your seriously saying you don't need to calculate the enterprise value for a private company valuation?
"Cowards die a thousand deaths, but the brave only one," Bill Shakespeare
So just to get this right:
A purchase price based on a "debt free / cash free" basis is the same as a purchase price based on the Enterprise Value of a firm?
A "cash free / debt free" deal is only relevant if the acquiror is NOT assuming any debt of the target (i.e., all debt has a change of control clause that triggers automatic repayment), correct?
Lastly, I have one more question:
In the case of a public firm acquisition, what is the actual purchase price paid to target's shareholder's based on? Enterprise Value or Equity Value + Control Premium?
I've always thought it was Equity Value + Control Premium and not TEV (cash free / debt free basis).
If so, does that mean that the outstanding debt of the target is ALWAYS assumed (and perhaps repaid after closing the deal) since the transaction is not based on a "cash free / debt free" basis?
Thanks for the insight!
Have a look at this post, I trust it will help you to understand it: http://www.wallstreetoasis.com/forums/ma-questions-expertise-needed
Mezz is correct in that the cash will be swept and the debt will be completely paid off by the seller, replaced by the debt package assumed by the buyer. The only trick is that the buyer and seller need to agree on an adequate level of working capital to go along with the business. This is so that the seller doesn't start going nuts collecting receivables and postponing payment on payables in order to juice their pre-close cash position.
~~~~~~~~~~~ CompBanker
Westfald, calculating enterprise value for a private company is the same as calculating its value on a cash free / debt free basis.
In other words, you need to know a company's enterprise value to know what the deal would look like on a cash free / debt free basis.
So what Mezz said is consistent with the article you posted.
Yeah thats what I thought, I don't know what the discrepancy was over. I'm a week out of training so whatever.
"Cowards die a thousand deaths, but the brave only one," Bill Shakespeare
read his question and your answer... he asks about why it is presented on a cash/debt free basis and you answer with enterprise value...
the firm's value is irrespective of capital structure... if a building is 100 feet tall, does it really matter how many floors there are? no, because its still 100 feet tall no matter how you cut it therefore there is no need to present the cash/debt basis...
Mezz, I'm not sure if I'm misinterpreting your last post, but enterprise value IS THE SAME as value based on a cash free / debt free basis...
I think thats what westfald was trying to get at by mentioning TEV.
As you stated, it presents value irrespective of capital structure.
it was an answer to wesfald as his original answers to the posters question made no sense... eventually he mentioned EV and a cahs/debt free but in a mutually exclusive fashion.. that's what my post was answering...
Yes Mezz was correct on how I answered question, bad answer on my part no biggie. Noted.
"Cowards die a thousand deaths, but the brave only one," Bill Shakespeare
LBO - cash free debt free (Originally Posted: 09/16/2009)
Hi,
I am working on an LBO. When they are saying it is a cash free debt free transaction, does that mean the existing cash and debt are wiped out for the pro forma? If so, where does it balance? I can only think of goodwill as the balancing factor. Thanks!
yea, you wipe them off as you proforma the balance sheet after acquisition...
the cash you can create a toggle that allows u to either, use it in the deal or wipe it off as if it was taken out...
the debt is wiped off unless you know it will be rolled over (change of control clauses)...
when you compute the net asset value with the target balance sheet, you can already have it stripped or you just exclude the cash & debt from the NAV calc.
So if the cash and debt are taken out, what would be the balancing change for the balance sheet?
well, you've just got to think of it conceptually as if it was happening 5 years into the deal and you realize:
if debt is greater than cash, you net out the debt leaving zero cash and then you need to wipe the debt out.. so since you cant do that in the inc. statement, you've got to do it thru the cashflow statement.. so that means you need to inject equity to do so raising you equity amount by the decrease in debt (zero sum diff)...
If cash is bigger than debt, you eliminate debt and think how a company can get rid of cash through its statements... well that means a dividend which reduces net income to common which impacts retained earnings meaning any cash balance reduces the equity thru retained earning by an equal amount...
at the end of the day, your goodwill is the same as the net asset value stays the same when you adjust it... you're just reallocating the resources as if the company ran normally in a one time adjustment to pf it...
OK in my scenario, it says the selling shareholders pay all the debt before they sell, leaving a clean slate. How would that affect the balance sheet then? You wouldn't need to raise equity because the existing debt is paid for by another party.
The "cost" of the seller paying of the debt will be reflected in the buyer's purchase price.
In other words, the buyer will pay a higher price to structure the deal on a cash free / debt free basis.
If the debt was not repaid, but instead assumed by the buyer, the purchase price would reflect this by being lower.
So even if it is explicitly stated the purchase price is ie. $100 million, you would add the existing debt to that to come up with the new purchase price?
my explanation is targeted purely at how you debt free / cash free the pro forma, pre acquisition target balance sheet...
there are quite of rules you need to apply for the post acquisition pro forma balance sheet and eliminating cash and debt are tehe simplest of things to worry about...
I would really appreciate it if you can tell me what would you adjust in the balance sheet post acquisition for debt free / cash free. I am building out the model now, but I don't know what the balancing entries would be. As I said, the exiting shareholders are paying for the debt, so no need raise equity to pay for it.
Cash Free Debt Free basis - Post deal (Originally Posted: 09/17/2009)
In a LBO deal say firm X buys firm Y on a cash free debt free basis for $200m. Pre-deal closure the firm X had $50m as cash and no debt. Does the deal imply that the firm X gets paid $200m post deal and it also gets to keep the cash it had previously ($50m)?
In a cash free / debt free deal, the target would get the $200 m and keep the $50 m in cash.
This would represent its "equity value."
Keep in mind, depending on the deal structure, the target may not always be allowed to keep the cash post-deal.
Thanks ya!! Could you please give some examples of the kind of deal structures prevalent in cash free deb free basis?
Debt/free cash free, how do you balance the BS in a merger? (Originally Posted: 06/19/2013)
Guys, I tried looking at older posts, but wasn't getting it.
I have the acquiring co. buying the target for $380m. From that, $250m is supposed to be debt and the rest cash.
I'm going through the adjustments to pro forma the combined cos. balance sheet. The buyer has a negative cash balance on its latest BS, so when I subtract the seller's cash, I get an even larger resulting negative number.
Any thoughts? I subtracted the existing debt on the target too, but don't understand how to compensate for this as an adjustment because the purchase price is fixed at $380m.
Here are the figures:
Acq. Co. -12 Cash $129 CA (including cash) $780 Total Assets $42 CL $370 LT Debt (existing) $368 SE
Seller $27 cash $98 total CA $380 total assets $145 CL $145 LT Debt $900 SE
So for LT Debt, I would net out $250m and $145m existing debt. And for cash, net -12 and -27, right?
Or would cash adjustment be the amount used in the acquisition $380-250?
Also, this is an asset sale (private company), so would $380 be the EV and not the equity value?
It would be the EV or Transaction Value. Cash should be acquisition proportion amount if I'm understanding correctly.
Here is the model guyz. Please help.
http://www.filedropper Dot com/wsohelpmexls
First link isn't working
http://www11.zippyshare Dot com/v/43999726/file.html
use the revolver for a negative cash balance and that will add up on debt
Yea, so would I make the revolver a plug?
This is your link?
http://www11.zippyshare.com/v/43999726/file.html
Yes, that is it. Anyone?
Remember that this is an asset sale, not a stock sale.
bump, pls help me guys!
chill u askin 4 help b rsplctful
huh?
(correct me if i'm wrong) How did you determine that the EV= 380?. I don't see a "Sources & Uses" table in your model ? you need that to determine the total price and to tie everything in. if you are to net out the debt, you need to have "refinanced debt" on your sources side,
B/c the buyer is paying $380 for the business via an asset sale. So basically, paying for 1x the assets. But, they are only funding it with $250m of debt. So, I plugged in the remaining from cash, from which the $130m remaining I am going to pull from existing equity (retained earnings from the buyer). Is that right?
I'm not trying to find the value, the purchase price was given to me.
if the purchase price is given, I assume it is just the equity purchase price. normally, the buyer needs more than just the equity purchase price due to transaction fees/ financing fees...etc. however,if 380 is the EV. then , your "Sources & Uses" table needs to be equal to $ 380 on each side. Why do you net out buyer's existing debt since the buyer will eventually pay it off ? as I mentioned before, if you are gonna net out seller's existing debt, you would need more than 380 to pay for the deal. and you need to have " refinanced debt" on your Uses side. basically, like this,
1) if debt assumed Sources: buyer cash+Revolver:1.3 ( is seller going to finance it as well or ??) new debt: 2.5 assumed debt:1.45
Uses: assumed debt:1.45 equity purchase price 3.8
2) if debt refinanced Sources: Buyer cash+revolver (plug in) New debt:2.5
Uses: refinanced debt (to net out seller's existing debt): 1.45 equity purchase price :3.8
Thx for the response. Since this is an asset sale, I thought $380 would be used to buy the assets. If $380 is used to buy the assets (1x BV of assets), then shouldn't the equity value be less than $380 since A = L + SE? To find the equity value I took the transaction value and subtracted out net debt (less debt + cash).
Yeah, in this case, I think it is similar to equity value, the concept, yet it is not exactly the same, it is like a lump-sum purchase price. But, anyway, that's how the S&U table works. you should be able to make the balance sheet balanced.
That is what I'm trying to figure out. I was told they are going to pay the 150 in cash, but they have no cash. And realistically, they can't fund it all through debt (revolver + TL), so what is the solution?
I can't help much but at least I can say the file is free of virus:
https://www.virustotal Dot com/en/file/a4825db6ab92ecafc937ce8b9c123ae6eed7bf06129306265aa7af47c13afce1/analysis/1371776363/
use the revolver... revolver was created exactly for situations like these..
Debt free cash free basis - impact on valuation (Originally Posted: 10/28/2014)
Rookie question - hows does the fact that a transaction is on Debt free cash free basis impact your EV?
Does this mean that Net debt is = 0 for valuation purposes and hence EV = equity value when pricing a deal?
For the buyer, it doesn't impact anything. Look up the formula for EV.
For the seller, they simply add cash to equity value and use a portion of the proceeds to payoff existing debt.
Please muder my logic if I'm wrong. I'm only a peon at this point in time having done some reading on this site and on M&I. I'm going to do this without looking anything up, just based off of what I remember thus far.
Enterprise Value = Debt + Equit - Cash/Cash Equivalents
From the Buyers perspective:
I'm buying this company using debt-free cash. Life is good and I don't need to worry about a thing.
or
I'm buying this company. They have a chunk of debt-free cash that I will aquire. The EV formula tells me I need to exlude cash from the total value. Free cash in my pocket? (Doesn't feel right).
From the Sellers persepective:
Hey, I also have a chunk of debt-free cash going out the door along with this company. The EV formula tells me I need to exlude cash from the total value. Free cash in their pocket? (Doesn't feel right).
or
Hey, I am selling this company that also has debt-free cash along with the deal. That's worth/should be worth something in this deal. Value it and give me my portion.
Please help.
Not even sure where to begin
Stock acquisition on a cash free / debt free basis (Originally Posted: 03/11/2015)
I'm working on an analysis where I'm supposed to model a stock acquisition on a cash free / debt free basis. I need to put together a 3 statement model, etc.
The sell-side bankers sent us a target balance sheet on a cash free / debt free basis (i.e., a balance sheet with no cash or debt).
The Company also has NOLs that will be subject to a section 382 annual limitation (equal to the LT tax exempt rate x fair value of equity).
How do I determine what the fair value of equity is here?
Is it just equal to the net assets that I am buying? I.e., total assets (not including cash) - total liabilities (not including debt)?
Why wouldn't the purchase price just be a multiple of EBITDA? Is this posted in the correct forum?
I'm asking about the implied equity purchase price - not the transaction value/enterprise value/aggregate purchase price.
Section 382 limitations are based off of the fair value of equity.
It's tricky in this case since its structured as a stock acquisition but on a cash free / debt free basis (which is more akin to the the enterprise value).
Cash free / debt free transactions are mainly seen in asset purchases (vs. stock purchases).
bump
Cash Free, Debt Free FCF model question (Originally Posted: 06/23/2015)
For context: This is for a relatively large (think 8-9 figures) purchase of a private company, by a large, publicly traded Company. I have a solid conceptual understanding of DCF modelling, would like to better understand how an experienced banker would approach creating a pro forma balance sheet in practice.
A key metric for us pulling the trigger on the deal is the CFROI, which I feel is not being accurately represented. The model I am using pulls certain liability accounts e.g. short term debt, accrued expenses, other long-term liabilities, into the FCF analysis through the Net Working capital change. The issue is that the balance sheet is set up with significant values in these accounts in Year 0, and $0 in Year 1, causing a massive cash outflow. The theory is that this is a cash free, debt free deal, so all of those accounts should go to zero after we purchase, and only AP is added back in based on DPO. However, that does not seem to be a realistic assumption of how the business would actually function (e.g. it is going to accrue expenses in any given period).
Can someone provide some insight as to how they generally pro forma balance sheets with respect to debt like items on cash free debt free deals?
Appreciate any insight.
AP =/= debt
Not really sure what you're asking here.
Working capital typically just rolls over and is assumed by the purchaser but even if it isn't it's 6 of one and a half dozen of the other -- if you pay out AP, it just gets stretched back later as a source of cash.
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