Purchase Price, in the context of an acquisition, is not as simple as it might otherwise sound. To arrive at the Purchase Price for a target company the parties involved must first agree on the value of the company. This value is often defined in a stock purchase agreement as Base Purchase Price or Initial Purchase Price.
The working capital adjustment in a stock purchase agreement can have a direct impact on the price paid for the business. Given that price is arguably the most important variable in a transaction, and that the working capital adjustment can impact price, it follows that the working capital adjustment deserves special attention.
If an investment were to grow by precisely 6.7% each year for 200 years, and then lose half of its value in year 201, how would the investment record change?
An article by Jim Grant, one of my favorite financial writers and analysts, highlighted this excellent thought exercise which provides an entertaining way to explore the difference between the two most commonly cited measures of investment performance: the internal rate of return (IRR) and the multiple on invested capital (MOIC). From the article:
The LBO case study and financial modeling test are now live as part of the LBO Video Series. Please see the link that follows for the updated files: LBO Case Study: BabyBurgers LLC. The introductory video is also available below.
Evaluating the appropriate capital structure for a particular acquisition is critical. In this post we will explore how to build a schedule to facilitate this process, and then demonstrate how to link this schedule to a LBO model.