I am figuring out how to model a PE transaction (my first). Here’s an extremely simplified question on what the TargetCo balance sheet will look like post acquisition.
TargetCo balance sheet pre-acquisition:
Net current assets: $200k
Fixed assets: $800k
Long term debt: $500k
Equity: $500k
Total acquisition cost is $1.8m - refinancing long term debt is $500k and price of equity is $1.3m. PE company wants to fund purchase with 90% shareholder loans and 10% equity.
How does the post-acquisition TargetCo balance sheet look?
If there’s a resource out there that can help me find the answer please let me know.
This is one of those things where every time the actual accounting ends up being a little different than the analyst treatment, but typically you would approach it like this:
Goodwill created (assuming there is an SPV in the mix which is loaded up with the financing and subsequently merged with the OpCo): 1.3m-0.4m =0.8m
Your new debt on the bs is 1.62m (treating sh loans as debt which they probably shouldn’t be)
Your new equity (theoretically) is 0.18m
Total adjustments on liabilities side are 1.12m-0.32m = 0.8m
Total adjustment on asset side is 0.8m (goodwill).
That is the typical analyst way of looking at it. In practice, the treatment will differ based on jurisdiction.
This was a fun little exercise. I’m not a PE specialist, but thought I knew enough to take a shot at this simple model.
I get the following result:
Post-Acquisition Assets:
500k : Current Assets
500k : Fixed Assets
800k : Goodwill (that’s a lot of goodwill, it seems)
1800k : Total Assets Post-Deal
Post-Aquisition Liabilities
1670k : Debt (500k initial debt + 90% of (Equity+Goodwill))
130k : Shareholder Equity (10% of (pre-deal equity + goodwill))
1800k : Total Assets
These numbers look slightly different from picton’s. It looks like this difference depends on how you interpret what the 90% figure means.
Picton’s numbers look like they come out if you assume the final company’s capital structure is 90% debt and 10% equity. My figures come out if you assume that current debt remains on the sheets (perhaps refinanced at current rates) and current equity holders are bought out with funds that come 90% from debt and 10% from new equity issuance.
EDIT: As I reread the initial post, I’d say Picton’s interpretation is probably the right one for this language, so Debt=1620k and Equity=180k post-deal