Equipment Purchase Right Before Close

January 18, 2023

by a searcher from University of Pennsylvania - The Wharton School in Seattle, WA, USA

I couldn't find an existing post so hopefully this hasn't been covered before.

I am negotiating a purchase for a company with delivery trucks. This year they were planning to purchase trucks but the delivery was delayed and may arrive right before close. From the seller standpoint, they don't want to give away brand new trucks. From the buyer standpoint, these trucks should have already arrived and the existing trucks have more wear and tear than normal due to the late delivery. Is there an industry standard way to manage this? I was thinking along the lines of how a working capital PEG is used but wanted to see if anyone has found a good solution for this in the past.

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Reply by a professional
from Simon Fraser University in Vancouver, BC, Canada

Hey Christopher, by no means an expert on this exact scenario, but giving my CPA/TS background input on this. Were the trucks a prepaid expense? If so, the value should have already been reflected in the purchase price allocation, and therefore the buyer should be entitled to the trucks without further payment. If payment is due on delivery and they just arrived, would need to look how the purchase price has been allocated amongst assets as of now, and adjust. Would imagine a lower goodwill in this scenario. In this case, the buyer has not compensated the sellers for these trucks in the PPA and working capital peg, therefore they would need to add their FMV to the deal, with the seller using their cash to pay for the trucks. However, given the trucks were delayed the previous trucks have had higher depreciation, this should be reflected in a lower price/FMV for current trucks. In conclusion, would depend if the trucks were included on the balance sheet via a prepaid expense, if so, the buyer should have no obligation to add anything since they have compensated the seller for the asset. If the trucks are not on the balance sheet in any capacity, the seller would pay for the trucks with the buyer compensating the seller at the price paid. The current trucks would have an increased depreciation in both scenarios, so this should reduce the FMV for the current trucks. Happy to jump on a call and discuss in deeper detail on this matter.

Reply by an investor
from The University of Chicago in Chicago, IL, USA

The issue here is whether the new vehicles are replacement CAPEX or growth CAPEX. If they are being purchased to replace other vehicles that will be retired (taken out of the fleet) - the expense is replacement CAPEX, and the cost should be paid in the entirety by the seller. If the new vehicles are intended to start a new route / penetrate a new territory / or add a new milkrun path - the cost is growth CAPEX. With growth CAPEX, the question now becomes as to whether or not the financial results of the new "growth" were included in the projections / projected EBITDA provided by the seller that the buyer used to underwrite the deal. If the growth results were included - the seller should pay since they have been given credit for the resulting economics in the form of valuation. If the growth was not included albeit a discussion, the buyer should pay. After all of the foregoing finance-concepts, if you want to play hardball - do not pay for these vehicles. The seller is in a tough spot, and it is had for ANY seller to be compensated for near-closing date capital expenditures. Really matters here if the seller is walking away with cash or staying with Newco < that should influence your decision, and the way you negotiate the issue.

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