Equipment Purchase Right Before Close

by a searcher from University of Pennsylvania - The Wharton School

1 year ago

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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searcher from WHU-Otto Beisheim School of Management

Hi Christopher, what we are doing in those situations: Look at average capex spend during the last years, adjust it for growth of the business (i.e. higher avg. capex) and then see whether in 2022 there was higher or lower spend than before. In case lower, followed by a negative purchase price adjustment, in case of higher, vice versa. By that it is fair for both sides and you can just see whether you or the seller should pay for the new trucks. In case of more questions, feel free to reach out!

1 year ago | like reply | 2 likes

searcher from University of Pennsylvania - The Wharton School

As others here have said, it depends. We run into this regularly, usually relating to plant equipment, and I'm not aware of any standard. Might seem obvious but you're buying the expected cash flow generated by the assets being transferred to you, or more to the point the productive capacity of those assets. If the business historically generated $5MM EBITDA using 5 trucks each of which cost $500k and has to be replaced every 5 years....you and seller can do the FCF DCF accordingly and "should" be able to agree on that approach and take into consideration the remaining life of the vehicles. Although as Walt points out, if the new vehicles represent growth capex then it's a different story. Even if replacement/maintenance capex, the parties might want to consider whether the new vehicles can be expected to have materially lower operating costs, etc.

1 year ago | like reply | 0 likes

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