In a growth model, why are transactions costs added to equity value?
Saw this in the model and I can’t really understand why that is. Wouldn’t that have the opposite effect and make equity value go down? And on a post money basis for the cap table, why does the primary investment also include the fees?
Appreciate the help!
Can you show what you're seeing? To my understanding the equity investment goes to the company and the company bears the cost of transaction fees
See below for the breakdown to equity value
LTM revenue
entry multiple
=EV
- Existing debt
- New debt
+ Cash
= Equity Value
+ Transaction and financing fees
=Equity Value (incl. fees)
This is from a growth equity modeling example.
Transaction costs decrease equity value, they don’t increase it
That’s what I assumed but I was assured that it’s right for growth equity deals.
I don’t do growth but that makes no sense to me. Transaction costs decrease the value distributable to shareholders.
.
The response I got from the person who created it was “However, for the purposes of some pro forma deal metrics we "invent" a new metric "Equity value plus fees" which includes fees.”. If it’s just a metric used in growth equity then that’s fine but conceptually doesn’t really make sense.
Then why bother even creating this metric
Maybe because cash equity is being used to fund fees in addition to the purchase price in the S&U?
Ie I buy a company for 100mm and incur 10mm of expenses, that’s 110mm in uses. My source is 110mm of cash equity
Is this the S&U? Equity is being used to fund fees, what’s confusing about that?
From a S&U perspective, adding an incremental amount of fees increases your equity check, assuming constant debt
The example is correct. In every transaction, you have to pay fees, and you typically pay those fees with more equity. The total sources and uses isn’t supposed to “tie” to any specific number. It’s going to vary depending on assumptions you make for a variety of transaction assumptions, such as fees, breakage costs, minimum cash, and other closing adjustments.
Jesus dude lol. Are you actually a 2nd year?
Did you ever figure it out? Going through this course atm and I'm thinking the same. The fees are definitely included in your equity check, and thus should be a part of your returns analysis. But they should not be factored in when using your equity check to calculate the post-money valuation (it doesn't impact any of the other investors how much in transaction fees you pay).
Thought about this for like 4 minutes. I think the only way this makes sense to me is if you are not talking about equity VALUE but rather the equity CHECK.
To calculate the check you need to write to buy smth, then yes holding debt constant any increase to the total uses of funds (such as fees) of course increases the equity check.
But those fees are not equity value, I.e. the proceeds to common units in the event of a sale of the business. Once you pay K&E and BofA you don’t also receive shares equaling the value of their fees. If someone bought the business from you the next second, for the same price you bought it for, you are out the fees.
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