LBO - Sources Question (Full Cash on Balance Sheet vs Excess Cash)
I have a question regarding the sources section of an LBO. I understand that min cash is a use of cash because it is the minimum amount needed to run the business so it effectively will increase the amount we pay or "use of cash."
Where I get confused is on the sources side. Do I then include the entire amount on the balance sheet or only the amount over the minimum cash? For example: If the business I am buying has $150 in cash on balance sheet and I need a minimum cash of $100 to operate, do I include the entire amount on the sources side of a balance sheet or just the excess of $50?
I have looked a few previous models and people seem to do both.
My thoughts are you should include the full cash amount on the balance sheet because you can use that entire amount to reduce your purchase price (similar to the equity to enterprise calculation) and any needed min cash will just be reflected on the uses side. Not sure why people use just the excess cash but I have seen it in the macabacus model and others.
Let me know your thoughts.
Thanks,
You put the full 150 on the sources side and on the uses side you will have 100 cash to to the BS for operating purposes (or less if you have conviction that you would need less) and 50 cash will be used for the acquisition.
From a value perspective, the buyer will typically make you pay for the full 150 - unless part is trapped, etc
Hope that makes sense
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