Tricky LBO model test: Comps and PPE
Hello Monkeys,
Two questions regarding a model test that i received.
1.) If there are comps given with median/ avg. gross margin and EBITDA margin, how would you model this into your income statement? My way: put those figures in last year and then gradually model towards this figure. Also, use EV/EBITDA from comps for entry and exit
2.) PPE: Currently, the value of PPE is given as "value of PP&E from 3rd party estimate"; if i try to backsolve those figures with last year ppe + capex - depreciation, does not solve. How should I model this going forward, given the transaction is an asset deal? I modelled Capex % of revenue, depreciation with a capex schedule.
Thanks!!
Here it sounds like they’re giving you something for a market value as opposed to book. That’s likely going to be what is actually paid, which should be your Gross PP&E basis for moving forward.
sounds plausible. If you have higher margins, you might actually have a company that is a winner in the sector (operational excellence, brand, etc). It's a reason to further analyse drivers behind this.
PPE from 3rd party is indeed the value you took from transaction date (and increase depreciation based on that). Remainder is goodwill. Seller will record a capital gain from the sale of the assets (value in excess of book value).
Thank you. So reg. 2:
I will take that basis of PPE, and model in future years with my own depreciation and own assumption of Capex? Any other aspect I have to consider (this is an asset deal, not share deal?)
Seems like you're having more issues with question 2 than the first one.
Appears to me the prompt is telling you the market value of PPE compared to your book value of PPE you have in your balance sheet. Assume this third party valuation is higher than what you have in the book, then what you need to do is adjust this amount as part of the excess purchase consideration (i.e. excess purchase price consideration to be split between goodwill and revaluation of PPE).
Following which you would need to create a new line item for deferred tax liabilities created (due to fair value adjustment providing a future benefit) and this would correspondingly increase your goodwill. Note that when this happens your net assets stay the same - increase in goodwill from DTL and the DTL itself.
Finally you can depreciate the revalued PPE as per what is given in your prompt or whatever you think is reasonable. New buildings? 20 years. New trucks? 8 years. Anything reasonable should work, you get the drift.
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