Building a model assuming $75m of acquisitions each year
I am building a three-statement model for a company that has a lot of acquisitions and I want to assume that they make $75m of acquisitions each year. How would I go about this? I was told to use the same sales multiple as a previous acquisition, what does this mean? Also, would I have to make assumptions on how each balance sheet item is affected (like, what if the target company owns a building or has some debt)
I usually see this assumption with an EBITDA multiple, but it will work the same way with a revenue multiple. If you assume $75mm of acquisitions per year and a 1.5x revenue multiple, you are “buying” $50 of revenue per year after the acquisition. You would have to record the $75 million as a cash outflow and can then add the incremental $50 of revenue each year after the acquisition.
Thanks! How in-depth should someone go with the balance sheet? Should I make some assumptions for BS items such as pp&e, debt, goodwill, etc.??
That depends on what you’re using this for. I never model the B/S because it has no effect on what I do. If you have a legitimate reason to use a forecasted B/S, go for it; if not, I would skip it.
Ctrl+c. Ctrl+p. Ctrl+s. Ctrl+alt+delete. Down, enter.
This isn't as straightforward to model unless you are willing to forgo any nuances to a large extent. Acquisition cost ($75m) is one thing, but the first thing you'll have to assume is the form of financing (debt vs equity and the resulting assumptions). Next you'll have to work out the pro-forma financials, how much of revenue and EBITDA do you have to consolidate? After that comes the balance sheet issues, what's the acquired asset base and how do you depreciate/amortise it? Does the acquired company follow the same tax codes?
If you make some high-level assumptions, this won't be too difficult, but it really depends on how detailed you need to be.
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