What happens to cash when you buy a company?
Hey guys,
Would really appreciate some help with a probably really basic accounting question.
When you purchase a company, let's say through an LBO.... what happens to the cash of the target? Does the seller take it all with them? So, once you own the company, there's 0 cash left?
The reason I guess I am a bit confused is because you subtract cash from the EV formula....
Thanks so much guys. I know this is basic - but for some reason I'm having some trouble here.
Cash is an asset on the balance sheet and is added to the combined balance sheet (along with all the other assets) in a merger. Say you buy a company for some amount and it has $20MM cash, $180MM other assets, $150MM Liabilities, $50MM Shareholders Equity. On your combined balance sheet you have $200MM of additional assets, and then you account for purchase price, cut the shareholders equity, add in goodwill, etc...
You subtract cash out from the EV formula because: a) it's already accounted for in the market cap (equity value) of a public company b) it decreases net debt/net liability and allows dividend payouts, so in essence it is a resource you are purchasing along with the company
a) equity value accounts for all assets. why don't we remove all them ? b) for listed companies you'll (more or less) pay the market cap + premium + non-refi-debt-w/change of control provision c) cause once you buy the comp you can walk straight to the coffers and take that cash. so might as well not account for it.
You seem to get this wrong "you subtract cash from the EV formula". Read the article below. Short answer to your question; acquirer owns the cash in the company & pays for that cash through equity value calculation of the business. https://www.wallstreetprep.com/blog/common-topics-of-confusion-for-inve…
Thanks for sharing the link
Except in an actual LBO, the cash is almost always swept at closing and goes to the seller.
This is what I see 95% of the time
From a theory, modeling, and (usually) legal perspective, this is correct for a buyout of a private company almost all the time.
From a practical perspective, the business you're acquiring still has to operate, pay bills, etc.; it's practically hard to sweep every dollar of cash; and you as the buyer are funding some minimum cash balance day 1 anyway. So, often times you'll see a purchase price adjustment for cash left on the BS at close even if the deal is structured cash-free, debt-free.
Not sure what you're asking
Theoretically when you think about VALUE - i.e., what do I pay for this business, the cash is netted out to get to your EV. Therefore, it gives you an idea of what this business is worth. This is based simply on the fact that the buyer owns the cash so it lowers his financial burden after purchasing the company. It doesn't mean the actual cash balance on the account goes to 0.
In terms of what happens is to the cash in an actual situation, I mean it doesn't disappear and there can be closing accounts or some type of adjustment that is made to ensure sufficient cash on balance sheet so that the seller is not pillaging the cash before closing
Seller will always take out as much of the cash as they can and leave enough for working capital. How much working capital is reasonable is one of the most important areas of negotiation.
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