So I am working on a relatively complicated S&U and Cap Table (warrants, LTIC, multiple parties, etc.) for a potential management buyout situation. My boss is convinced that the TEV (both current and pro forma) and the Sources and Uses should be the same number. I don't think that's the case, and I have looked at a number of bank books where that's not the case... am I losing my mind?
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Uses should be total purchase price (typically i'd show as equity purchase price plus any net debt refinanced) plus transaction fees (financing fees and m&a/legal advisor fees). Sources will equal your uses and be a combination of our financing sources, debt and sponsor equity.
Essentially the transaction fees will make it so your S&U don't equal EV.
This is correct. One would think your boss would know this, and it isn't far off, but S&U = EV + Trans Fees.
Simple example:
$300 purchase price (EV)
Sources: TLA - $100 Sub - $50 New Equity - 149.1 Roll Equity - $7.8 = Total $307
Uses: Purchase of New Equity - $287.3 Roll Equity - $7.8 Pay Off Existing Debt - $5.1 Financing Fees - $3.8 Transaction Fees - $3.0 = Total $307
He is right. Your equity value calculation is probably weird, but a flow of funds should still add up to the agreed equity value. Anything else that makes up the enterprise value that is not either taken out is rolled over by default. Just include this in both the sources and uses. The sum of all of this and fees should be the transaction value.
Well....are we talking a flow of funds document or a sources and uses table?
Your funds that flow to the current owner should match the agreed upon enterprise/equity value. your uses, however, should include financing and transaction fees, which won't really flow over to enterprise value (and your S&U table should balance). This should also ultimately be recognized in a flow of funds document showing the funding of financing costs/transaction costs/attorney fees etc.
That said, they shouldn't be terribly far off unless this is a rather small target.
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