LBO BS Adjustment: Advisory Fees
Hi monkeys,
I am trying to get my head around balance sheet adjustments for a vanilla LBO model and have had trouble having A / L+SE balance due to Advisory Fees (M&A, legal etc, not financing). I have read that it should be taken out of Shareholder Equity (out of Retained Earnings) but how do we make things balance on the asset side? I have an imbalance in the model I built. Should it be taken out of cash? is this something we take out in the goodwill calc (i.e. goodwill = seller proceeds - Equity book value - M&A advisory fees) ?
StreetOfWalls says the following but I'm not sure what they mean by 'off balance-sheet cost'
- The Equity adjustment reflects the fact that the original equity is effectively wiped out in the transaction—the “adjustment” amount shown here is simply the difference between the new equity value and the old one. The new equity value will equal the amount of the total equity funding for the transaction (sponsor plus management’s rollover) less the M&A fee, which is accounted for as an off balance-sheet cost.
Great if you have a functioning template illustrating any answer . I have also attached my WIP file with adjustments in orange, column Q to S, row 81 to 111
Thank you :)
PM'd
Hi NAPOLEON,
I went through your LBO BS Adjustment to audit and found that you were calculating the "Total Liabilities" incorrectly (i.e. forgot to add "Total Current Liabilities") which is why it didn't balance. The M&A Fee adjustment should be made (as you have correctly did) in the Shareholder's Equity portion of the BS but not in the adjustment for PF Goodwill (since you are already making the adjustment in the Shareholder's Equity portion). Hope that helps!
Best,
tkid55
Looks like the KKR PE LBO test.
Cash: Reduce to min cash
Goodwill: To existing GW, add seller proceeds less existing shareholder's equity (new created GW)
Old Debt: Reduce to zero
New Debt: add full value less financing fee (contra liability)
SE: take out old SE and add on new sponsor equity less advisory fees
As to where the advisory fees get taken out of for “assets“: the advisory fee falls under uses; assuming fixed turns of financing, you’d need to size up your sponsor equity one-for-one. So you aren’t taking out of cash so much as forcing the sponsor equity check to implicitly include the advisory fees. Here’s how to understand; consider a deal with $10 advisory fee and the sponsor equity check (plug) is $100. If the advisory fee is free (0), the sponsor equity check can fall to $90. Doing pro-forma adjustments shows that you wipe out existing shareholder equity, and instead of subtracting the $10 fee from retained earnings and adding $100 of sponsor equity, you are now subtracting $0 fee and adding $90 sponsor equity: same end result.
Thank you! That was super helpful
I have a follow up question. When you take advisory fees out of shareholders' equity for the pro forma BS, do you account for the tax shield?
Nope. The idea is to keep it simple.
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