in calculating proforma goodwill, can someone tell me why you add existing cash on the balance sheet to the purchase price of equity number before subtracting the book value of equity?
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Because the cash is getting swept to the seller in the case of an LBO before it closes. Thus, the cash won't be on the balance sheet and that's the way of adjusting for it. Think of it this way, what would the balance sheet look like if you were to have cash were dividended out to the owner before closing? Your assets, along with your equity / book value would go down right? What's the equation for goodwill? Purchase price less book value. A lower book value means your goodwill would go up, and that's exactly what adding the cash to the goodwill equation accomplishes.
Now, if you were to assume that the cash remained on the balance sheet and wasn't swept out, you wouldn't need this adjustment to goodwill.
Does that make sense to you?
i see, thank you that is helpful. so you wouldn’t be double counting it when you credit the existing cash out when doing the purchase accounting to arrive at the PF balance sheet?
No, as that would be the whole reason you are adding it to goodwill to begin with
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