• 106 06/09/2020

    In this post we will cover the process of adding a new debt schedule to a three-statement model. For this exercise we will be using the three-statement model built at the beginning of the Integrating Financial Statements video series (template available for download at the bottom of this post). 

    Before we get started we are going to make some minor adjustments to the layout of the current debt schedule. Please see the two images that follow.

    Old Debt Schedule:

    Debt Schedule in a Three Statement Model

    New Debt Schedule: 

    The new debt schedule groups all of the variables related to any particular tranche of debt together. To make it a little easier to navigate the worksheet, each debt tranche now has its own header as well. The new debt schedule is visible in the bottom of the image (indicated by the red rectangle). 

    Changes are indicated by a small x on the left-hand side of the image.

    Debt Schedule in a Three Statement Model

    This is an updated approach to projecting debt balances, which is more common in LBO models (as you will see in the LBO Video Series). Below you will see the new debt schedule populated for this new debt raise. 

    Updated Debt Schedule in a Three Statement Model

    Sequence for Linking the New Debt Schedule to the Model (click on the image below for a full-size view):

    Once you have built the new debt schedule, all that is left is to link it back to the three financial statements. This can be accomplished in four steps.

    1. Link Total Interest Expense on the debt schedule to Interest Expense on the income statement.
    2. Adjust the Cash balance in period 20X2 to reflect the New Long Term Debt raise.
    3. Link New Long Term Debt on the debt schedule to the balance sheet.
    4. Link the changes in the debt balance in each period to the cash flow statement.

    Adding a Debt Schedule to a Three-Statement Model

    Please note that this update does not address the associated financing fees. This is addressed in the LBO Video Series

    Template available for download: Download Template.

     

 



  • 105 05/21/2020

    ***PDF available for download at the bottom of the post.***

    This section of the stock purchase agreement contains statements of fact and assurances made by the Seller that must be true and correct as of the closing date. In an aggressively summarized format, the Buyer is looking to have the following confirmed: 

    1. That the Seller has the authority to enter into the purchase agreement and sell the securities described, and that the share count and capitalization represented are accurate.
    2. That the Company is duly organized, validly existing and in good standing.
    3. That the financial statements provided are complete and correct and fairly present the financial condition of the Company.
    4. That there are no undisclosed liabilities.
    5. That the company has all required permits and operates within the boundaries of the law.
    6. That taxes have been paid and returns have been filed. 
    7. That Seller has provided information regarding the Company's litigation matters, employee matters, as well as the material contracts of the Company.
    Summarized even further into one sentence: The Buyer needs to know that the Company’s key assets are covered, that it can legally operate and that the Buyer is protected from potential liabilities that might have been the Seller’s responsibility or that grew under Seller’s ownership.
     
    Beyond this summarized format, the Representations and Warranties of the Seller or the Company can cover somewhere between 20 and 50 separate topics.  
     
    Focus of the Article: The type of business being acquired and the industry it operates in will have a big impact on which representations and warranties are of focus. For example, a manufacturer of lead-acid batteries for forklifts will be more focused on compliance with labor and environmental laws and the permits required to operate. In contrast, the acquisition of a business that has developed proprietary technology, say a database to manage hospital patients and predict outcomes, will place an emphasis on representations and warranties surrounding intellectual property.
     
    Stock Purchase Agreement Language: The pages that follow contain hypothetical language detailing the above sequence as it might appear in a stock purchase agreement. DOWNLOAD PDF
     

     

 



  • 104 05/12/2020

    A stock purchase agreement is the primary transaction document for a stock acquisition. The purpose of the stock purchase agreement is to confirm the price paid for the securities sought, to control risk to the degree possible and to provide a roadmap for the hold period. 

    The two most important variables in any investment are price and risk. It is said that the best way to control risk is through price, but that assumes you know precisely what you are buying and how you are protected in the event that there is a misrepresentation about the assets acquired or liabilities assumed. 
     
    For this reason, the bulk of this document deals with identifying variables that could put the investment at risk, and detailing how the parties can protect themselves in the event that they are exposed to loss. Beyond price, parties should be aware of three primary concepts:
    1. Representations and Warranties
    2. Covenants
    3. Indemnification
    As the PDF available for download will explain, these three items focus on the assurances and promises made so that the parties can comfortably enter into a transaction, and the protections available to them in the event of a breach.
     
    PDF Commentary:
     
    The purpose of this document is to provide an outline of the stock purchase agreement with some context to make the document easier to digest. 
     
    On the pages that follow, each primary section of the purchase agreement (referred as an article) will be introduced with simple language (no legalese). Beneath each introduction you will find links that provide additional detail on the article described (this portion of the document is a work in process; more links will be added in the future). 
     
    This approach facilitates an introduction to this document in as few as five pages. It also provides a framework that can be revisited when a particular topic or concept requires review without having to navigate a dense legal document.  
     
     
 




 



Models are:
 
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above

 

 


*Answers a, b, c, d, e, f and g are all correct.