How to calculate working capital and tax calculationsWorking Capital Analysis
A prospective acquirer is evaluating the impact on enterprise and equity value based on the historical balance sheet for the last year. Using the model on the worksheet Working Capital Analysis:
- determine the impact on changes in asset values on equity value,
- calculate the difference in anticipated equity purchase price based on a renegotiated working capital target, and
- determine the difference in equity value if there was no working capital adjustment mechanism.
Question 1: If in September increased sales improve the accounts receivable $1.0 MM, and reduce inventory by $600,000, what will be the new projected adjusted equity value (line 41) at closing of the target company?
Question 2: If we agree to a reduction in the target working capital to be delivered at close, reducing the target from $8.8 MM to $8.0 MM, what will be the revised projected adjusted equity value (line 41) if we close at the end of November?
Question 3: If we eliminate the working capital adjustment mechanism altogether, which month would be the best month to close for us as the buyer - September, October, November, or December - solely based on the working capital calculation?
Question 1: What is the adjusted equity value in September (P) with modified asset values?
Question 2: What is the adjusted equity value in November if target working capital is reduced?
Question 3: If we eliminate the working capital calculation, what is the best month to close for the buyer?
Tax Analysis Model
The taxable consequences of a transaction are dependent on the type of transaction and the specific tax situation of the target company and the selling shareholders. Selling shareholders should consider deals in terms of net after tax dollars rather than gross.
Question 1: To make the selling shareholders indifferent to a stock versus asset purchase, how much would the buyer need to increase the purchase price on an asset deal to make it equivalent, on an after tax basis, to a $50 MM stock purchase?
To further analyze the impact let's modify the fact pattern to determine under what circumstances the deal structure might become more or less attractive.
Question 2A: Rather than the target being a low asset intensity high brand name company, let's revise the asset base to be reflective of an industrial distributor. Modify the target company's Tax Basis in Assets (Refer to the worksheet, Acq Alternatives - Seller; cell: L11) to determine what the difference would be between a stock and asset deal for the sellers on an after tax basis, if the company had a tax basis of $35 MM?
Question 2B: What would be the value of the step-up in basis to the acquirer based on this change in the target company net asset value? (Refer to the worksheet, Buyer - Asset Transaction; (result in cell: C18)
Question 1: Purchase price on a net after-tax neutral asset acquisition for the sellers?
Question 2A: Difference in an asset and stock deal with increased company basis?
Question 2B: Value of the step-up to buyer with increased company basis?