Building a full-scale model

1. Assumptions (purchase price, sources, and uses)
2. IS
3. CF
4. BS adjustments
5. Depreciation schedule
6. Operating working capital schedule
7. BS projection
8. Debt schedule

3. CF

CF from operations

In the CF from operations, we conservatively lean toward consolidating both the acquirer’s and target’s line items with the understanding that operations are core to the business at hand.

CF from investing activities

With the exception to CAPEX, in the CF from investing activities, we conservatively take just the acquirer’s line item, as the assumption here is that:

• the target’s investing activities are not as core to the acquirer;
• any investing activities the target had once employed are now eliminated and maintained at the acquirer level.

CF from financing activities

Think of financing activities in 3 major sections:

• Raising/buying back equity
• Raising/paying down debt
• Distributions

Typically, anything related to target equity will be eliminated, as well as the target’s debt if it’s agreed in the acquisition.

4. BS adjustments

What happens to a balance sheet when a buyer comes into the business

The buyer is paying for:

• Shareholders’ equity at a premium (control premium)
• Net debt (ST + LT – cash) and other obligations
• Other holders

The buyer is receiving:

• Total assets (excluding cash): accounts receivable, inventory, prepaid expense, PP&E
• Total liabilities (excluding net debt & other obligations): accrued expenses, accounts payable

Additional adjustments

3 major categories of items are created upon the acquisition:

• Goodwill
• New debt
• New equity

The adjustments made are based on the sources and uses of funds.

Content source: Paul Pignataro. (2020) Mergers, Acquisitions, Divestitures, and Other Restructurings