17 Oct Acquisition Balance Sheet – Where Deal Structuring Takes Place (Part 2 of 2)
Continued from Part 1
Structuring Fixed Assets
Again, fixed assets should be operating; those tangible assets (excluding inventory) that are necessary in the production of operating cash flows. This category includes: a) real estate, b) leasehold improvements, c) machinery and equipment, d) vehicles, e) office furniture and equipment, f) etc.
• Treating the real estate owned by the business as a non-operating asset or an operating asset.
- If treated as a non-operating fixed asset, remove building depreciation, and substitute a fair market triple net rent as part of operating cash flows. Value the business and real estate separately (different risk profiles). Real estate may or may not be purchased by the buyer.
- If treated as an operating fixed asset, then the real estate is considered purchased. When valued together, the risk profiles are combined – the business portion and the real estate portion.
• Other Fixed Assets structuring issues that may arise:
- Seller has made significant investment in fixed assets before they’ve had an effect on producing operating cash flows. Maybe an earnout is a solution? (see article)
- Seller has excess non-operating fixed assets (e.g. personal auto). Generally, seller retains.
- Seller’s fixed assets are in need of repair or are deficient to maintain operating cash flows. Buyer will often negotiate a price reduction.
Structuring Intangible Assets
In a business transaction, intangible assets are those “residual assets” remaining after subtracting working capital and fixed assets from the transaction price.
• Define who owns the goodwill. Is it business goodwill or personal goodwill? (see article)
• Define how non-compete, consulting and employment agreements are treated:
- Included as part of the transaction price and part of the intangible assets that produce the operating cash flows?
- Not included as part of the transaction price and additional compensation to the seller?
• Define how payments under an earn-out are to be treated: a) additional intangible asset (transaction price)? or b) earned income (to the selling individual)?
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