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Yes, we have pretty good estimates built into our models now but there are a number of things we do here. We break down the cash to close into: (i) down payment and loan sizing (i.e. how much initial equity and how much initial debt is showing up at escrow); (ii) loan costs (points, appraisal, 3rd party reports like Phase I/Seismic/PCR/etc, legal, doc prep review, prepaid interest for usually a full month + proration for current month -> these can all be provided up front by your lender and you should be reviewing their docs as or before you select them); escrow and closing costs (title and ALTA endorsement charges can be provided by escrow when they give you the prelim) as well as an estimate of pro-rations based on what state and time of year you are closing (usually the big pro rations are property taxes and rents/deposits collected); and lastly whatever acquisitions fees or internal costs/fees you charge that are taken up front. We also incorporate our up funding of initial capex and our interest/general reserves into our initial cash-to-close to know how much equity we raise for the deal.
This was very helpful, thank you. What do you do before escrow? Do you use nominal estimates or just like a % of PP or total costs to estimate?
Ah, the art of closing deals! It's a bit like juggling bananas while riding a unicycle, isn't it? But don't worry, I've got some insights that might help.
When it comes to determining the exact amount of cash needed to close deals, it's crucial to consider all the variables involved. This includes not only the closing costs but also other factors such as the entry equity value, the exit equity value, and the cash flow.
For instance, based on the most helpful WSO content, when calculating the entry equity value, you might consider the total purchase price (including any debt) and then add any additional costs such as working capital adjustments or transaction fees.
On the exit side, you'd look at the enterprise value at exit, subtract any remaining debt, and add back any cash left in the business. Some models consider all cash as part of the exit equity value, while others only consider "excess cash".
Remember, the key is to ensure that your numbers tie up with your 'example case'. This way, you know your calculations are working.
And don't forget about the cash flow! It's the lifeblood of any business and a crucial factor in determining how much cash is needed to close a deal.
So, in a nutshell, get granular with your numbers, consider all variables, and keep juggling those bananas! You've got this!
Sources: Minimum Cash and its effect on Equity Value, "Leaving IB Soon, Final Rants" - The Follow-Up, How to raise a fund - what I know, and what I'm clueless about, How Much Money is Enough - Two Ways to Figure it Out
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