Treatment of ABL Line in Transaction as NWC?
May 07, 2021
by a searcher from The University of Arizona - Eller College of Management in Denver, CO, USA
We're working on a transaction where the business has a large ABL facility, using the AR as collateral.
My view is, all businesses are cash-free and debt-free enterprise valuations.
For simplicity purposes, I'll use round numbers. We have placed an enterprise valuation of $100 on the business. The Line of Credit is currently drawn to $70. There are a few other pieces of long term debt on the business totaling $10.
We view the equity value in the business to be $20. The banker pushed back and has said they view the line of credit to be part of the net working capital in the business and thus should not be included in the calculation of equity value, making it $90.
This is the second time I've heard this concept argued by a banker, but I've never heard of anyone who's actually bought this.
Any insights out there?
from The University of Chicago in Chicago, IL, USA
Few comments: 1. How did you derive EV? If you used multiples, that is a potential source of problem###-###-#### borrowing against A/R on 100 EV makes me wonder what kind of business is this. May be a highly seasonal one. If so there are proper ways to structure the deal. 3. Also, why the focus on equity? Are you buying equity?
The banker is also wrong, dead wrong. It is one thing if the banker is trying to get more value for the client, but unfortunately many times the banker does not understand DFCF balance sheet, just like many Search Funders think that EV is just a multiplication of two numbers. If Corporate Finance was so simple we would not need Wall Street and finance courses in college.
Happy to help. Just DM me.