Software LBO - capex, A/R, A/P, D&A, intangible acquisition assumptionsSubscribe
Could you please help me to wrap my head around LBO of growth software company.
I created a basic LBO and noticed (revenue and margins forecasts const) that my assumptions about capex-depreciation, intangible acquisition-amortisation and NWC can change the price dramatically. So how do I arrive at reasonable valuation?
Capex-depreciation: should I just assume Capex=Depreciation? They cancel out, but depreciation influences tax I pay, lowering my FCF. Also - should I drive them as historical % of sales? It's a growth biz so sales skyrocket - not sure company would invest in PP&E with same speed, especially given it's software business
Intangibles -amortisation: now this is a problem as i have never seen anyone accounting for intangibles purchase in LBO (typically it's EBITDA less tax, less interest, less capex and less change in NWC) - but my company invests a lot in this stuff and also amortises a lot. Also - should I just drive as historic % of sales?
NWC: How should I project these? I understand in software biz receivables are important as typically prepaid services. So makes sense to drive as % of sales. Also - what is the difference between deferred revenue and receivables?
But what should I do with payables? It sounds a bit dumb dumd just to assume same % COGS as last historic year. Companies can try to manage NWC better in future...should I attempt to assume it, or play safe and stick to historicals? Maybe in growth businesses receivables are lower than payables, but as business matures we see reversion - company collects more with less costs to suppliers manifesting in payables...?
Would appreciate inteligent advice about logic about drivers of these items, different ways to argue. Because as you see - my approach is quite simplistic and unsophisticated. I might get these things wrong in my model, but want to make sure I give good reasons why.