How to capture Transaction Expenses in LBO model
For transaction expenses in an LBO model, are they captured by debiting retained earnings, crediting cash, or making an adjustment in the goodwill calculation?
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Transaction expenses like M&A fees and legal expenses add to the Uses section and come out of retained earnings. Financing fees, however, are typically amortized and will land as a non-current asset on the BS.
Correct.
Very helpful - I have seen in some models where transaction fees are taken out in the goodwill calculation in purchase price adjustments but i guess this is wrong?
Separately should you link to transaction expenses from S&Us or does this need to be tax-affected?
What about from a income statement perspective? The above is how i've seen templates but shouldn't the fee's be tax deductible? I may be missing something...
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Transactions fees are tax deductible, the thing is that they do not show up in a LBO when you run your model immediately following the transaction. Think about it, everything that shows up in RE in the BS should be flowing through the IS, so yes, mechanically you're right.
Small caveat on treatment of financing fees: Financing fees for revolvers get asset capitalized and amortized over tenor. Financing fees for loans and bonds are set as contra-liabilities (reduce carrying value) but also get amortized over tenor.
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