3 Statement LBO add on Question
Given a standard 3 statement LBO: Opening balance sheet, IS, Cash flow statement and then there is an add on in year 2. How does this impact the PF B/S.
Understanding that if you raise incremental debt that will affect your pro forma balance sheet. I am assuming you have to do another step up analysis to create good will etc. to properly balance the balance sheet? Is correct / common in a 3 hour LBO modeling exam ?
Interested
Not terribly common in a 3 hour modeling exam, but not unheard of. If they do have it, then you're probably going to have an easier rest of the model, as this will take up a chunk of the time. Here's a step-by-step on how it might look:
Determine Purchase Consideration: This is the price to be paid for the add-on. It can be funded through a mix of debt, cash on hand, or potentially new equity injection.
Incremental Debt: The amount of additional debt raised will be added to the liabilities side of the balance sheet. Along with it, there may be associated deferred financing fees that will be amortized over the life of the debt.
Goodwill Calculation: Similar to your initial LBO purchase accounting, you'll need to perform a Purchase Price Allocation for the add-on. This entails adjusting the assets of the target to fair market value. The difference between the purchase consideration and the fair market value of net assets acquired will typically be booked as goodwill on the assets side of the balance sheet.
Other Intangible Assets: Depending on the nature of the add-on acquisition, you might also identify and assign value to other intangible assets (like customer relationships, trademarks, or technology). These will also appear on the asset side and will typically be amortized over time.
Deferred Tax Liabilities (DTL): If the PPA results in stepping up the value of certain assets (like property, plant, and equipment), there might be associated deferred tax liabilities created due to the difference between book value and tax basis.
Cash: The cash account will be reduced by any cash consideration paid for the acquisition. If the acquisition was fully debt-financed, then the net change in cash might be minimal, but if there's a mix of financing sources, cash on hand might be used and will be reflected in the balance sheet.
Integration of the Add-On's Financials: The balance sheet items of the add-on (both assets and liabilities) will be integrated into the pro forma balance sheet. Depending on the nature of the acquisition (e.g., stock vs. asset purchase), certain liabilities might not be assumed by the acquiring company.
Equity Adjustments: Depending on how the acquisition is structured, there may be adjustments to equity. For instance, if new equity is injected to finance the acquisition, this will be reflected in the equity section of the balance sheet.
Very helpful, thank you. Are the more common scenarios other than add on typically in this 3hr window?
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