Debt & Debt-Like vs. WC Peg Treatment
When negotiating SPAs, the accountants sometimes get pretty animated debating whether some specific types of items should be treated as a debt / debt-like item OR a WC peg, but not BOTH. In the heat of a deal - I've never really understood this.
Can someone provide an example and ELI5 on the concept? What is an example of something that can be an adjustment to a WC peg OR a debt-like item? Is there typically a preference (from a buyer perspective) on which to put it in? Why is there emphasis on not including both as a DDL and a WC peg adjustment (assume it's double-counting - but would love to actually understand the mechanism)
Interested to hear others thoughts but when it comes to negotiations with a vendor, the following priority have the biggest effect on the amount of equity required:
a) any downward adjustment to EBITDA, as the business valuation is often a multiple of sustainable earnings. So a $5m earning adjustment at 10x multiple is worth $50m. If the valuation is fixed then this will have no effect.
b) debt and debt like items because the full amount of debt and debt like items is deducted to arrive at equity value. On a $500m EV transaction, if $100m of debt and debt like items are identified then equity value is $400m
c) working capital peg as only a change to the peg is what is counted for or against you as a buyer. If the NWC peg is $100m and reduces to $90m, then the buyer receives $10m as part of the completion accounts process
If you look at a balance sheet or a recent FDD report you’ll see that line item are classified as debt or NWC to avoid double counting.
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