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I’m only putting stuff in the debt table that I have a credible argument for treating as Debt in the purchase agreement.
Gotcha, thank you!
Federal/state income taxes, yes (deferred taxes, no…unless it’s a significant liability and could put as an OC).
Vacation, sales tax - usually ordinary course business. However (1) check the LOI for guidance if already agreed upon (2) consider vacation policy - if the PTO accrual doesn’t cap out, you should consider some as debt. Why would a buyer want to pay for a boomers 5 years of accrued PTO when they retire?
It shouldn’t be “preference” or else you look dumb on a readout.
Good point on the LOI, thank you! Assuming the same rules for sell side?
I think it’s preference. More of the conservative approach to call out for the buyer
Vacation accruals are typically non cash + ordinary course (the biz has employees and that’s just part and parcel with being an employer). That said, I may propose excluding from NWC as it doesn’t reflect short term working cap needs of the biz + increases peg
This makes sense, thank you
Vacation- No unless there is a big CA/IL workforce with a very relaxed carryover policy
Sales tax - No unless there are nexus type exposures unaccrued on the balance sheet or discovered in tax due diligence. Check with your tax team
Income taxes - almost always debt like treatment. Make sure you clearly understand balance by jurisdiction- payable versus refund situation. Refunds can be treated differently in the SPA. Another topic to connect with the tax team on
At the end of the day you can just throw all this on the table for the client but what ends up in the purchase agreement will vary and will be ultimately negotiated with other items. A good FDD advisor should look at all economic points holistically and help the client think about pros vs cons of each option
OP, this is a thorough explanation and how you should be looking at these items.
It’s not a matter of “preference” but about setting things up in a way that is 1) reasonably objective and 2) beneficial for the client (while still trying to uphold #1)
On the sell side, you generally want to keep as many current liabilities in NWC as possible and avoid calling things out as indebtedness so that your client won’t have to pay those out at close. This also increases the odds of setting the NWC peg lower which will hopefully allow your client to over-deliver at close and get a higher total purchase price.
On the buy side, you’d want to argue to treat things like accrued bonus, pto, etc. as indebtedness so that you do not inherit those burdens post-close, and this would also raise your LTM averages which you can argue to peg NWC at.