LBO Model - effective date vs closing date
Trying to get my head around a problem and unable to source a real solution.
In a modelling test scenario, what is the best way to tackle a question where you are given a both the actual closing date and a transaction reference date (the reference date being the most recent FYE for the business). So FYE is Q3-22, and the transaction closes at Q4-22 with a Q3-22 reference date.
Initial thoughts are that this require modelling a stub for the remaining 3 quarters (Q1-23, Q2-23, Q3-23), but in theory would you also be entitled to cashflows from the first quarter but not have the impact of debt expense for that quarter or am I over complicating this? In addition, does anyone know a good template that has a stub built in - the only one I've seen is Macabus which is far overengineered for a typical 3h LBO modelling test.
Thanks all
No you would not be entitled to the cash flows or the interest expense until the deal is closed and dollars are out the door you don’t own the business. You don’t have the right to cash flows on the business and until the lender funds the money they don’t start accruing interest. Correct would be to model a stub period for the remaining three quarters. Easy way to do this would be to multiple all relevant cash flow items by 75% or would create a toggle that says % of base year elapsed or something to that effect and multiple everything by 1-the toggle (in this case would be 25%). Should get the job done and be quick enough for a modeling test. FYI your IRR calc should start at close date not reference date as well since that is when money goes out the door and the clock starts.
Understood on your response, thank you. However, if making a simplifying assumption, and assuming the transaction is done under a locked box mechanism my thought was that you wouldn't even need to break down the year of the transaction into pre-/post-closing since you would be entitled to all earnings since the locked-box date (the FYE in this case). Only for the IRR and debt calculations you would have to take into account the closing date but not for the 3 statements. Maybe also including an interest payment on the purchase price from locked-box date to closing.
With respect to your solution above this would be the case with closing accounts, where you would break down your financial statements into pre-/post closing periods within the year of the transaction, and you would only be entitled to the post-closing earnings.
So essentially the question is, when given the option, is there an easier method than just stubbing out the year?
Also to add, the B/S provided in the question is at FYE (1 quarter old) so there is an incentive to try and not to roll this forward a quarter.
I agree. Also makes sense from my perspective.
You are entitled to receive the cash as the buyer in locked-box anyway and as a compensation towards the seller you are paying an interest on purchase price, which should more or less equal the cash generation during the period between the reference date and closing. In the end you are financing the cash via debt/equity.
Did you hear any other opinions in the meantime?
Your cash-in (EBITDA) and cash-out (interest) start from closing date. If that is FY 2022 (with effective date being 1/1/2022), I would start at FY 2022 also to match your actual equity contribution with your investment period to get to a true IRR. This is under the assumption that locked-box interest and cash generation cancel eachother out.
Using the timing of the locked box accounts will be wrong in any case as your equity contribution isn't done until closing.
With the caveat that there may be NWC swings which won’t be compensated for (yes it’s in the peg but that’s only the normalised level and doesn’t compensate for closing cash)
**** Let's assume I acquire a company via a buyout with locked-box date 31/12/21, sign the deal on 01/06/22 and close it on 01/09/22. Purchase price interest until closing and no recent financials post FY21 assumed ****
How would you apporach this? I would still use the BS FY21 and build the FY21PF view (with all the buy-out adjustments) and then project for FY22 from there on. I agree about the IRR calculation of course and adjustment for interest expenses of course.
Yes - where signing is irrelevant. Closing date is the start of your stub period under new ownership.
In locked-box the purchase price is calculated based on the locked-box BS on the reference date (here: 31/12/21), but you would suggest to then build a BS for the closing date (here: 01/09/22) and make the pro-forma adjustments on it? This would be the right approach for Closing Accounts, but I dont see how this works for locked-box.
You would need to project the BS based on the locked-box financial statements and then make BS adjustments that are based on new BS positions that dont fit to the intial purchase price calculations?
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