How to model a $10MM acquisition annually in PE model test?

Here's a high-level overview of how the acquisition could impact the three financial statements:

1. Income Statement:

• After the acquisition, you'll need to consolidate the acquired company's financials with the acquiring company's. This means adding the acquired company's revenues, expenses, and profits to the respective line items on the Income Statement.
• You might also have to consider any adjustments for amortization of intangible assets that arise from the acquisition, which would increase the amortization expense.

1. Balance Sheet:

• On the asset side, you'll add the acquired company's assets (tangible and intangible) to the acquiring company's Balance Sheet. You might need to adjust the values to account for fair market value adjustments and goodwill. Goodwill is calculated as the purchase price minus the fair value of net assets acquired.
• You'll also need to show the cash outflow from the company, assuming that it's an all cash sale. If you buy with debt, make sure that's accounted for as well.
• On the liability side, you'll add the acquired company's liabilities to the acquiring company's Balance Sheet. If the acquisition is financed with debt, you'll also add the corresponding amount of debt to the liabilities section.
• Finally, you'll need to adjust the equity section to reflect the acquisition, considering the purchase price and the method of payment (cash, stock, or a combination).

1. Cash Flow Statement:

• The acquisition will have a significant impact on the Cash Flow Statement, mainly in the investing and financing sections.
• In the investing section, you'll record the cash outflow for the acquisition as a reduction in cash from investing activities. If the acquisition is an annual event, you'll have to adjust this figure each year.
• In the financing section, if the acquisition is financed with debt or equity, you'll need to reflect the inflow of cash from debt issuance or equity issuance, respectively.