Balance Sheet Cash
May 01, 2023
by a searcher from Harvard University - Harvard Business School in Westchester County, NY, USA
Target has a large cash balance, but a lot of cash is required to run the business. If I modeled a take private LBO, I'd use "Balance Sheet Cash: Current Cash Less Min Cash" in the Sources column, and I would have a "Fund Cash Balance: Min Cash" in the Uses column.
Does that make sense in a takeover of an SMB? What's the "right" way to model balance sheet cash in these transactions?
Somehow I'd think a seller would just say, "No, that's my cash, you can't use it to pay me!"
from Rutgers in New York, NY, USA
1.) Sources & Uses focus on how the seller will finance the Purchase Price of the business. This is because the amount of equity and debt play into the debt paydown and IRR calculation, which are the primary reasons for running an LBO model.
2.) Any model you create will be based on assumptions. The assumptions you're making should be probable assumptions. So unless you have a reasonable basis to assume both parties will agree to this, I wouldn’t make this assumption.
3.) Since we’re talking about a take private, the buyer is likely a PE firm. Most have strong relationships with banks and can get a cash flow or ABL revolver for that min cash needed to run the business. This is generally a much better option for a PE firm than buying cash from the seller to keep it on the balance sheet. (The buyer would not be getting the cash for free)
Working Capital is a very important part of most businesses and therefore most models, but it gets the spotlight on the cash flow statement (or in its own WC schedule of its really important). It doesn’t generally have a seat in the S&U unless both parties have agreed the typical convention doesn't work for this deal
from The University of Chicago in Chicago, IL, USA
1) If there is deferred revenue, customer deposits, pre-paid subscription, etc. (collectively DR), buyer should assume such liability and should get needed cash to cover the cost servicing the obligation and associated profit.
2) In rare occasions, even when DR is absent, buyer is entitled to get some cash to cover certain unpaid obligations.
In your case, seller or his/her advisor, is entitled to say, "That is my cash".
I teach this topic in detail and have helped small and large deals including when Big 4 CPA firm is involved. happy to help.
(Note: If seller is a C Corp with excess cash and the structure is an Asset sale, then there is one more variation to minimize seller taxes.)