Accounting for acquisition/vendor cash

I buy a business, use their cash, new debt and roll 20% of equity - what are journals and goodwill?

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Vendor balance sheet - Net Assets £3.5m, of which £2.5m is cash that is being given to the vendor on completion

Transaction price is £5m, with £1m deferred to the owner of 80% of the shares and the owner of 20% of the shares is rolling all his equity to buying topco

Debt raised to cover purchase is £3m

What are the journals?

What is resulting consolidated balance post?

What is goodwill?

Does P&L reserves of selling business get cancelled out now?

 

Replies (17)

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Psycho
By Wilson Philips
29th Feb 2020 11:41

You say “I” buy a business with a sale tag of £5m. Are you seriously trying to do that with assistance from anonymous Internet posters?

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By Truthsayer
29th Feb 2020 12:01

Hello, accountancy student. You should do your own homework, or you will never learn anything.

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By Wanderer
29th Feb 2020 12:08

anonymous wrote:
Accounting for acquisition/vendor cash
I buy a business, use their cash, new debt and roll 20% of equity - what are journals and goodwill?
anonymous wrote:

Vendor balance sheet - Net Assets £3.5m, of which £2.5m is cash that is being given to the vendor on completion

Transaction price is £5m, with £1m deferred to the owner of 80% of the shares and the owner of 20% of the shares is rolling all his equity to buying topco

Debt raised to cover purchase is £3m

What are the journals?

What is resulting consolidated balance post?

What is goodwill?

Does P&L reserves of selling business get cancelled out now?

 

Thanks (0)
paddle steamer
By DJKL
29th Feb 2020 12:44

Who advised the 20% original owner, from owning 20% of a business with Net assets of £3.5m he now appears to have 20% (if it is 20% he gets) of holdco with liabilities of £4m (3m debt plus £1m deferred price)

Also why does holdco take on £3m of debt when there is £2.5m cash in subco and cash outflow re purchase is initially only £3m?

All presumes £5m transaction price is in effect settled £3m cash at outset, £1m loan and £1m re rolled over shares issued in holdco to previous 20% holder subco.

If this is a homework exercise the OP ought to post the actual question rather than what he/she has provided as there are a lot of holes re information.

PS- the £2.5m given to vendor on completion, does this mean holdco hives up the £2.5m , is this part of the £5m total cost of sub or in addition?

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Replying to DJKL:
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By Accountant A
15th Jun 2020 20:50

56a

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Replying to DJKL:
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By VanessaIC
29th Feb 2020 16:11

Thank you for the response and to clarify, this isnt a joke but an overseas student who has recently joined a practice and wanted to understand a situation without looking daft to my boss.

The situation is a live case albeit the numbers changed slightly hence the overraise on debt you notice. That said, the business needs both working cap and some cover for future deferred payment.

The 20% swap for 100% equity in topco is an existing director now becoming MD and in control of their business. As for advice, getting 100% of a £5m EV business by rolling their equity and using debt doesnt seem a bad deal to me and beats PE as it doesnt dilute new MD.

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Replying to DJKL:
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By VanessaIC
29th Feb 2020 16:16

Thank you for the response and to clarify, this isnt a joke but an overseas student who has recently joined a practice and wanted to understand a situation without looking daft to my boss.

The situation is a live case albeit the numbers changed slightly hence the overraise on debt you notice. That said, the business needs both working cap and some cover for future deferred payment.

The 20% swap for 100% equity in topco is an existing director now becoming MD and in control of their business. As for advice, getting 100% of a £5m EV business by rolling their equity and using debt doesnt seem a bad deal to me and beats PE as it doesnt dilute new MD.

As for the £2.5m cash that is in addition to the £5m EV, so equity value is £7.5m

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Replying to VanessaIC:
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By Accountant A
15th Jun 2020 20:50

=0u

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Replying to VanessaIC:
paddle steamer
By DJKL
29th Feb 2020 17:05

Did you actually tell us in the OP that existing 20% holder in sub is becoming the 100% owner of holdco?

So in effect Holdco B/Sheet post transaction:

Invest in Sub £5m
Bank loan -£3m
Deferred price -£1m
Net assets £1m

rep by shares/share premium £1m

Sub Balance Sheet remains as is.

Net assets £3.5m (not £2.5m I originally had)

Cap/Res £3.5m (not £2.5m I originally had)

Edited to correct sub B/Sheet

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Replying to DJKL:
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By VanessaIC
01st Mar 2020 09:45

Thank you, this was where I expected to be. The bit I was unsure on was with the business being sold debt free/cash free (bar the working cap adj) and the cash being repatriated to the vendor effectively being added onto the purchase price (on top of the £5m). Your example doesn't take account for that.

Wasn't sure how that impacted goodwill i.e is purchase price £5m or £7.5m (but £2.5m of that paid from cash bought in effect)? For what it's worth, I have been assuming in my goodwill and consolidation workings that the effective purchase price is the £7.5m

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Replying to VanessaIC:
paddle steamer
By DJKL
01st Mar 2020 16:07

I give up- if you do not know whether total price is £5m or £7.5m and what is paid to who (e.g.does 20%holder get £1.3m shares or £1m, does 80% holder get £3m cash,£2.5m cash and £1m deferred) then I certain;y do not; maybe consulting the heads of terms might be a very good idea.

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Replying to VanessaIC:
paddle steamer
By DJKL
29th Feb 2020 17:01

How do you get the £7.5m, take another look at that, you cannot double count the net assets (or the cash) as it is inherent within the price paid for the investment.

I would go and look at a textbook re consolidation and elimination of the investment in holdco with subco's share capital/reserves,I will leave it to you to compute your goodwill on consolidation. (And do remember that Fair Value ought to figure within your thinking)

Edited as I had got into my head the NAV was £2.5 no £3.5 in subco

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By Accountant A
15th Jun 2020 20:50

i5w

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Replying to Accountant A:
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By VanessaIC
29th Feb 2020 16:13

If you dont like a post just dont respond, I see no reason why you would respond just to post abuse. Maybe I could have been fuller and more professional in my narrative but it was a quick idea to use this forum as a sounding board that would protect my discretion

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Replying to VanessaIC:
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By Accountant A
15th Jun 2020 20:50

]-9y

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Replying to Accountant A:
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By VanessaIC
29th Feb 2020 16:29

You seem angry, A. Not my intention. I posted briefly because I thought if I sent a full TB and deal structure and answered myself it would look an unwieldy post that nobody would review. Whereas a smaller post may.

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RLI
By lionofludesch
29th Feb 2020 16:47

Vanessa - I dunno, love. But I'd rather look daft than [***] up a £5m acquisition.

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