I'm currently working through a few modelling tests and a few state that the transaction is cash free and debt free. The cases provide EV/EBITDA purchase multiples, however, I noticed that the equity purchase price ends up getting adjusted by the previous debt/cash balance. From what I understand, a cash free debt free purchase multiple would assume that cash is distributed and debt is repaid by the seller pre-transaction, and if the EV/EBITDA is given, this would reflect the purchase value and purchase equity of the organization after this process. Can anyone confirm whether I am thinking about this the right way? I think this would make an impact in terms of how you run the sources/uses as well as the good will calc. Any advice would be appreciated.
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Your assumption regarding the definition of cash free debt free is correct.
In the uses table, you would have the EV and txn costs.
The equity value does not equal the EV in a cash and debt free transaction.
We simply use EV as the purchase price (note this is not the equity purchase price used in GW calcs) as the definition of EV closely aligns with “cash and debt free” i.e where debt is repaid and cash is extracted from the business.
In a cash free debt free situation though, wouldn't your purchase enterprise value be equivalent to your purchase equity value though assuming cash and debt are eliminated from BS pre transaction?
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