Accounts Receivables are generated when sales are made to customers without receiving the cash for the sale. With Accrual accounting, a sale is booked when the Customer purchases or takes delivery of the item or product regardless if the Customer has paid for the sale. The sale then becomes an obligation from the Customer and that obligation from the Customer to pay the Company for the item or product purchased becomes the Account Receivable.
Accounts Receivables are aged by how old they are from the point of sale. This is often expressed in categories such as; Less than 30 days, 30-60 days, 60-90 days and Over 90 days.
Accounts Receivables are often pledged as Collateral for an Accounts Receivable Loan. It is common for a Loan to Value for an Accounts Receivable Loan to be 50%-80% of the Accounts Receivables less than 60 days old. Accounts Receivables over 60 days are often considered ineligible.
Accounts Receivable Aging Calculations
The basis for these calculations are the User Inputs for Ave Weeks to Collect the Accounts Receivable.
For beginning A/R invoices 0-30 Days old, the indicated % of invoices that are 0-30 Days has been calculated by dividing a standard 4 weeks for 0-30 Day category by weighted average of the User Inputs for the beginning A/R Weeks Outstanding by category for the total A/R. Collection of the beginning A/R will start in week #1 and be collected evenly over the weeks indicated.
For new sales invoices 0-30 Days old, the indicated % of invoices that are 0-30 Days has been calculated by dividing a standard 4 weeks for 0-30 Day category by User Input for the Future Ave Weeks Outstanding for the total A/R. Collection of the A/R will start in the week indicated and be collected evenly over the weeks indicated.
The A/R sales invoices 30-60 Days old calculation is the left over calculation after 0-30 has been set and over 60 (Loan Reserve) has been set. The Days to Collect for 30-60 day invoices are simply the # of days that are required to make the average between the three categories match the Average Weeks to Carry for the total A/R. This number will not go to a negative and in such cases will become zero.
For beginning A/R sales invoices 30-60 Days, the indicated % of beginning A/R will start collection in week #1 and be collected evenly over the weeks indicated. For new sales invoices 30-60 Days old, the indicated % will start collection in week indicated and be collected evenly over the weeks indicated.
There is a default maximum for the Wks to begin Collection for 30-60 Day old sales of 8 weeks. The lesser of the Default Max or the calculated amount will be used.
For beginning A/R sales invoices Over 60 Days, the indicated % of beginning A/R will start collection in week #1 and be collected evenly over the weeks indicated.
For new sales invoices, the Over 60 Day category will be made up of the Loan Reserve amounts, the indicated % will start collection in week indicated and be collected evenly over the weeks indicated. The week to start collection for the Over 60 Day invoices will be calculated with the Ave Weeks for the Total A/R as an overriding factor, for example, if the Ave Weeks for the total A/R is 4 weeks, then the Over 60 Day category can not be more than 4 weeks.
Accounts Receivable - Change in Cash
Cash is Used:
Income is reported in the calculations when Sales are made (not necessarily collected). Accounts Receivable (AR) are generated when sales are made (Income) and not received in cash. Using the AR Asset Input page, the User can input the factors that will govern the weeks to collect the cash from a sale from 0 to 52 Weeks (Accounts Receivable - Future Terms Set-Up).
Expenses are recognized when they are incurred, but not necessarily paid. When inventory is built or manufactured, cash is used but it will not be recognized as an expense until it is sold (COGS). The Inventory Asset Input page will allow the User to indicate how long the inventory will be carried until sold from 0 - 52 Weeks (Wks to Hold).
As AR's are collected and Inventory is sold, the AR and Inventory loans will be paid down by the amount of the AR collection and Inventory being used.
Cash is Generated:
As AR's are collected cash is received which does not create income. The collection of AR includes the conversion of the inventory to cash.
As new AR's are generated and new Inventory is purchased or manufactured, the AR and Inventory loans will increase as indicated by the terms of the AR and Inventory loans set up by the User in the Debt Input pages and by inputs in the Accounts Receivable - Future Terms Set-Up and the Inventory - Future Terms Set-Up .
If EBITDA Override is in effect:
If the User has chosen to override Sales and Cost of Goods Sold with a direct EBITDA override, the Accounts Receivable and Inventory balance will be the prior year ending balance less any current year write-offs, therefore there will be no change in Cash required due to changes in A/R, Inventory or A/P except for the current years write off's of A/R and Inventory. There are no AJE's available for A/R or Inventory however adjustments can be made using the Write Off process. See Transaction Sheet Asset Input for AR and Inventory Write Off inputs.
Beginning Accounts Receivables
This is the time over which the Beginning A/R will be collected in cash. Collection will be evenly collected over this time. This will apply to Beginning A/R balances only, after which, the input for the Future Ave Weeks to Collect will be used for the Horizon Period Years. If there is no selection for the future years, the default for future years will be the input for the Beginning A/R balance. If this is left blank, 0 will be used and all sales will be collected in the Sale period.
If the Existing Company is purchasing the Target Company, for Year 1, a weighted average will be calculated between the Weeks to Carry listed on the Transaction Sheet for the Target Company and the Weeks to Carry for the Existing Company. For Years after Year 1, the selections in the Ave Weeks to Collect in the Future Input will be used with no weighted average calculation. If there is no inputs to the Ave Weeks to Collect in the Future and there is no selection indicated in the Transaction Sheet, the entry for the Existing Company will be used for future years.
This Input is found in the Accounts Receivable Set Up pages for the Transaction Sheet and the Existing Company Accounts Receivable Beginning Balances.
Accounts Receivable Future Weeks to Collect
This will apply for future Horizon Period years selected by the User.
Weeks to Collect are the number of weeks on average that the Accounts Receivables will be outstanding.
For example, with Accounts Receivables, if cash is collected at the point of sale, then the Weeks to Collect can be 0. If on the other hand all sales are on "account" and are all paid within 30-60 days, then 6 weeks can be used.
This input is found in the Accounts Receivable - Future Terms Set-Up Input page
The Input should be a whole number and not a portion of a week.
At times it may become necessary to remove a certain amount of Accounts Receivables and Inventories that have become uncollectable as in A/R or unusable as in Inventory.
In some businesses, there may be the need to have a standard allowance for this on an annual basis or on a multi-year basis (such as every other year). This is a non essential voluntary input option.
The write off amount will reduce the Accounts Receivable and increase expense at the end of the year of the write off.
This option is found in the Accounts Receivable - Future Terms Set-Up Input Page.
The Accrual Basis method of accounting, recognizes income in the month a sale or income is made and expenses in the month the expense is incurred vs. the Cash Basis method of accounting that recognizes income and expense in the month that it was received and/or paid. This is a very significant difference. The Accrual Method is generally considered the most accurate way to look at the financial performance of a business. The ThruThink® analysis presents the User Inputs on an Accrual Basis. Where the User Inputs require an annual number in a certain year, the User should enter the amount incurred in that given year and not the amount received or paid.
The amounts incurred but not received or paid is reflected as Accounts Receivable and or Accounts Payable.
Inventory is expensed when it is used. Cash Flow reflects automatic purchases and usage governed by User Inputs for Weeks of Inventory on hand and % of Expenses that actually go into Inventory.
There are default inputs for Weeks for Collection for Accounts Receivable, Days for Payment for Accounts Payable and Weeks of Inventory that are applied to the annual accrual Income and expense amounts entered which automatically create Accounts Receivable, Accounts Payable and Inventory balances from the Users annual inputs. The User may adjust the Weeks for Collection or Days for Payment to adjust the Accounts Receivable or Accounts Payable accordingly as well as the Weeks of Inventory for the Inventory balance.
There are Individually Scheduled Item inputs for Income, Expenses, Inventory Usage and Purchases and Capital Expenditures. The User may enter specific Total amounts and the actual months for collection or payments for Income, Expenses, Inventory purchases and General Expenses as well as Capital Expenditures and Non Expense cash flow such as withdrawals or contributions.
For tax purposes, the User may indicate if taxes should be paid on an Accrual or Cash basis. If the User selects Cash Basis for taxes, the Income Statement will still be on an accrual basis with accrual based taxes as an expense, but the cash flow will reflect the Cash Basis tax payments. Any difference between the Accrual Basis taxes and the Cash Basis taxes will be shown on the Balance Sheet as a Deferred Liability when Cash Basis taxes are less than Accrual Basis taxes or as a Deferred Asset when Cash Basis taxes are higher than Accrual Basis taxes.
AJE Warning
Using the Adjusting Journal Entry provision requires a significant knowledge of accounting concepts including the effect of debits and credits.
When making AJE's, test the impact of the AJE by carefully checking the results including the impact on cash and Income/Expense.
The AJE provision in this analysis is for the User's convenience. There are infinite combinations of AJE inputs and pre-checking for all possible outcomes becomes impossible, therefore unexpected outcomes or even errors could possibly occur when using the AJE function.
All Adjusting Journal entries will occur in month 12 of the applicable year.
There are limited accounts that are available for an AJE entry. Review the list of available items on the bottom portion of the AJE Input page. Find the Item Entry Number for the desired item and input the number into the AJE Input page and make the desired Debit or Credit entry.
Entries in the input area for each year will directly effect cash. Inserting a positive number will increase the specific balance sheet account, reduce or use Cash (which will reduce Equity) and have no effect on Income or Expense (to effect income and expense, see below). Inserting a negative number will reduce the balance sheet account and increase cash. For an AJE to Equity Draws for instance, a positive number input (debit) to Equity Draw would be a decrease in Equity and result in a decrease (Credit) to Cash. Alternatively, a negative number input (credit) to Equity Draw would be a increase in Equity and result to a increase (debit) to Cash. The latter would be an Equity contribution. Any entry without an Item # listed however will create an Error in the analysis.
Assets
To adjust assets, insert a negative number for a reduction of the asset. This will assume that the asset was liquidated for cash. If no cash was collected or there was a difference between the asset reduction and cash collected (gain or loss), insert a corresponding number as an Income or Expense which will adjust cash and income or expense for the gain or loss. Use positive number for an Expense (loss) and a negative number for Income (gain).
If a depreciable asset account is adjusted, it is assumed that the asset was adjusted at the beginning of the year and the annual depreciation expense for that year will be adjusted in the % of the asset being adjusted to total assets and net income and income taxes will change accordingly.
When an asset is purchased, use the Capital Expenditures Input page to input the purchase. When an asset is sold, an AJE may be used to reduce the original cost of the asset (using a negative number) and if the sale price is larger, the difference between the sale price and the cost (prior to depreciation) as a negative number as Income, or if the sale price is less than the cost, a positive number as an Expense. The accumulated depreciation will be adjusted proportionately to the % that item cost is to the total cost. This is an approximation as the actual period the asset was placed in service (if different than the beginning of period 1) is not available by the calculations (asset purchases may be entered by the user in varying periods and the calculations can not anticipate these variations). The annual depreciation will be adjusted upward in accordance with the period the asset was purchased and downward with the period the asset was removed.
Liabilities
To adjust liabilities enter a positive number for a reduction of the liability. Like the asset adjustment, if the effect on cash is not the same as the change in the liability (for liabilities, a reduction in a liability account will mean a corresponding reduction in cash), insert a corresponding number as an Income or Expense which will adjust cash and income or expense for the gain or loss. Use positive number for an Expense (loss) and a negative number for Income (gain). Examples: (1) to write off an asset of $1,000,000, insert -1,000,000 for the asset and 1,000,000 for Expense. (2) to write off a liability of $500,000, insert 500,000 for the liability and -500,000 for Income.
Income or Expense
If a balance sheet item adjustment effects Income or Expense, a corresponding entry with the item # for Income or the Item # for Expense using an opposite sign from the Balance Sheet Item AJE.
AJE's to an income or expense is made as a AJE to general Income/Expense is used which will show up as a debit or positive number for an expense or a credit or negative number for income adjustment to Other Income - Expense on the Income Statement. Income tax calculations will reflect this adjustment to Income/Expenses.
Any change in income or expense through an AJE without a corresponding opposite entry will have a direct offset to cash in the current year.
Income taxes are calculated on the accrual basis and are an expense in the year they are incurred and paid with estimated taxes during the taxable year and finalized in Period 4 of the following year.
An AJE may be made specifically to income tax expense. A change to Income Tax expense through an AJE without a corresponding opposite entry will have a direct offset to cash in the current year.
When using Income or Expense AJE’s, if an offset to A/P or Accrued Interest is used along with it, on the cash basis, there will be no cash or tax effect. On the accrual basis, taxes will be adjusted and the cash will be adjusted by the net after tax effect. When using Income or Expense without another balance sheet account, it is considered a cash transaction and the offset is the tax expense and the net cash for both Cash and Accrual basis.
AJE's to a Note Receivable or Loan
When making an AJE to a loan, an AJE that makes the loan balance become negative (debit balance) is not allowed. If an AJE is made to one of the Specifically Scheduled Note Receivables, or Specifically Scheduled Loans (Scheduled Item) during the term of the note or loan, the resulting note or loan balance will continue to be collected or paid down with the same payments identified in the note or loan set up table. Any remaining principal outstanding at the end of the term will be automatically collected or paid in the final term. An AJE is not allowed to be made before a Scheduled Item is set to begin or on or after the year it is scheduled to be paid off. For the Interest only types of Notes or Loans (#0 or#3 type), the AJE amount will create a new balance and the interest will be automatically received or paid at the rate for the original note or loan. A subsequent AJE will then need to be made to reduce the principal balance. For an amortized or principal plus interest note receivable or loan (#1 or #2 type), an AJE made after the original term is expired will be automatically collected or paid off in the next period including interest for that period.
Non Cash Items
AJE's can be made to a (Gain) Loss on Sale account that will be a non cash item. This is mainly to adjust for a non cash Loss on the sale of assets. Actual gain in the sale of an asset that is a cash item should be made to Other Income/Expense.
Non Expense Cash Flow
Income and expense AJE's will flow to individual accounts and be accounted for both in the Income Statement and the Cash Flow Control. Non Income and Expense AJE items can either flow to the individual account such as many of the debt items. Those that do not flow to individual accounts will be collected in total and flow to the Cash Flow Control and Sources and Uses of Cash as Non Expense Cash Flow AJE Items in Total. These are summarized at the bottom of the Summary AJE Input page.
Accounts Receivables are generated when sales are made to customers without receiving the cash for the sale. With Accrual accounting, a sale is booked when the Customer purchases or takes delivery of the item or product regardless if the Customer has paid for the sale. The sale then becomes an obligation from the Customer and that obligation from the Customer to pay the Company for the item or product purchased becomes the Account Receivable.
Accounts Receivables are aged by how old they are from the point of sale. This is often expressed in categories such as; Less than 30 days, 30-60 days, 60-90 days and Over 90 days.
Accounts Receivables are often pledged as Collateral for an Accounts Receivable Loan. It is common for a Loan to Value for an Accounts Receivable Loan to be 50%-80% of the Accounts Receivables less than 60 days old. Accounts Receivables over 60 days are often considered ineligible.
Accounts Receivable Aging Calculations
The basis for these calculations are the User Inputs for Ave Weeks to Collect the Accounts Receivable.
For beginning A/R invoices 0-30 Days old, the indicated % of invoices that are 0-30 Days has been calculated by dividing a standard 4 weeks for 0-30 Day category by weighted average of the User Inputs for the beginning A/R Weeks Outstanding by category for the total A/R. Collection of the beginning A/R will start in week #1 and be collected evenly over the weeks indicated.
For new sales invoices 0-30 Days old, the indicated % of invoices that are 0-30 Days has been calculated by dividing a standard 4 weeks for 0-30 Day category by User Input for the Future Ave Weeks Outstanding for the total A/R. Collection of the A/R will start in the week indicated and be collected evenly over the weeks indicated.
The A/R sales invoices 30-60 Days old calculation is the left over calculation after 0-30 has been set and over 60 (Loan Reserve) has been set. The Days to Collect for 30-60 day invoices are simply the # of days that are required to make the average between the three categories match the Average Weeks to Carry for the total A/R. This number will not go to a negative and in such cases will become zero.
For beginning A/R sales invoices 30-60 Days, the indicated % of beginning A/R will start collection in week #1 and be collected evenly over the weeks indicated. For new sales invoices 30-60 Days old, the indicated % will start collection in week indicated and be collected evenly over the weeks indicated.
There is a default maximum for the Wks to begin Collection for 30-60 Day old sales of 8 weeks. The lesser of the Default Max or the calculated amount will be used.
For beginning A/R sales invoices Over 60 Days, the indicated % of beginning A/R will start collection in week #1 and be collected evenly over the weeks indicated.
For new sales invoices, the Over 60 Day category will be made up of the Loan Reserve amounts, the indicated % will start collection in week indicated and be collected evenly over the weeks indicated. The week to start collection for the Over 60 Day invoices will be calculated with the Ave Weeks for the Total A/R as an overriding factor, for example, if the Ave Weeks for the total A/R is 4 weeks, then the Over 60 Day category can not be more than 4 weeks.
Accounts Receivable - Change in Cash
Cash is Used:
Income is reported in the calculations when Sales are made (not necessarily collected). Accounts Receivable (AR) are generated when sales are made (Income) and not received in cash. Using the AR Asset Input page, the User can input the factors that will govern the weeks to collect the cash from a sale from 0 to 52 Weeks (Accounts Receivable - Future Terms Set-Up).
Expenses are recognized when they are incurred, but not necessarily paid. When inventory is built or manufactured, cash is used but it will not be recognized as an expense until it is sold (COGS). The Inventory Asset Input page will allow the User to indicate how long the inventory will be carried until sold from 0 - 52 Weeks (Wks to Hold).
As AR's are collected and Inventory is sold, the AR and Inventory loans will be paid down by the amount of the AR collection and Inventory being used.
Cash is Generated:
As AR's are collected cash is received which does not create income. The collection of AR includes the conversion of the inventory to cash.
As new AR's are generated and new Inventory is purchased or manufactured, the AR and Inventory loans will increase as indicated by the terms of the AR and Inventory loans set up by the User in the Debt Input pages and by inputs in the Accounts Receivable - Future Terms Set-Up and the Inventory - Future Terms Set-Up .
If EBITDA Override is in effect:
If the User has chosen to override Sales and Cost of Goods Sold with a direct EBITDA override, the Accounts Receivable and Inventory balance will be the prior year ending balance less any current year write-offs, therefore there will be no change in Cash required due to changes in A/R, Inventory or A/P except for the current years write off's of A/R and Inventory. There are no AJE's available for A/R or Inventory however adjustments can be made using the Write Off process. See Transaction Sheet Asset Input for AR and Inventory Write Off inputs.
At times it may become necessary to remove a certain amount of Accounts Receivables and Inventories that have become uncollectable as in A/R or unusable as in Inventory.
In some businesses, there may be the need to have a standard allowance for this on an annual basis or on a multi-year basis (such as every other year). This is a non essential voluntary input option.
The write off amount will reduce the A/R or Inventory and increase expense at the end of the year of the write off.
This option is found in the Accounts Receivable - Future Terms Set-Up Input Page and Inventory - Future Terms Set-Up Input Page.
Beginning Accounts Receivables
This is the time over which the Beginning A/R will be collected in cash. Collection will be evenly collected over this time. This will apply to Beginning A/R balances only, after which, the input for the Future Ave Weeks to Collect will be used for the Horizon Period Years. If there is no selection for the future years, the default for future years will be the input for the Beginning A/R balance. If this is left blank, 0 will be used and all sales will be collected in the Sale period.
If the Existing Company is purchasing the Target Company, for Year 1, a weighted average will be calculated between the Weeks to Carry listed on the Transaction Sheet for the Target Company and the Weeks to Carry for the Existing Company. For Years after Year 1, the selections in the Ave Weeks to Collect in the Future Input will be used with no weighted average calculation. If there is no inputs to the Ave Weeks to Collect in the Future and there is no selection indicated in the Transaction Sheet, the entry for the Existing Company will be used for future years.
This Input is found in the Accounts Receivable Set Up pages for the Transaction Sheet and the Existing Company Accounts Receivable Beginning Balances.
Accounts Receivable Future Weeks to Collect
This will apply for future Horizon Period years selected by the User.
Weeks to Collect are the number of weeks on average that the Accounts Receivables will be outstanding.
For example, with Accounts Receivables, if cash is collected at the point of sale, then the Weeks to Collect can be 0. If on the other hand all sales are on "account" and are all paid within 30-60 days, then 6 weeks can be used.
This input is found in the Accounts Receivable - Future Terms Set-Up Input page
The Input should be a whole number and not a portion of a week.
Amortized Assets include Goodwill paid as part of a Company Purchase (see Goodwill) or other non hard asset type of assets such as Patents, Intellectual Property, Trademarks, etc.
Items automatically included in Amortized Assets in the ThruThink® Analysis are:
The amount paid for the Company that exceeds the Value of the Company's Assets at the time of purchase will be capitalized to Amortized Asset category as Goodwill on the Balance Sheet and amortized over the Years for Goodwill and Transaction Expenses in the Tax Rate and Depreciation Input page.
Purchase Price changes as part of a Performance Earn Out Incentive
The Transaction Costs as entered by the User will be capitalized to the will be capitalized to the Amortized Assets on the Balance Sheet and amortized over the Years for Goodwill and Transaction Expenses in the Tax Rate and Depreciation Input page.
The Origination Points paid for the Transaction Sheet Loans will be capitalized to the Amortized Assets on the Balance Sheet and amortized over the Years for Goodwill and Transaction Expenses in the Tax Rate and Depreciation Input page.
Amounts from the Capital Expenditure Input page indicated as Amortized Assets will be added to the Amortized Assets on the Balance Sheet and amortized over the Years for Amortized Capital Expenditure Assets in the Tax Rate and Depreciation Input page.
The User may identify and list separately up to four different types, categories or groups for both A/R and Inventory.
Examples of A/R groups would be Due in 30 Days, Due in 60 Days, etc.
Examples of Inventory groups would be Finished Goods, Work in Process, Raw Ingredients.
The Days to Collect for A/R are the Weeks for each category of Accounts Receivable until the category is collected. The Weeks to Hold for Inventory are the average Weeks to hold before use for each category of Inventory.
After the User Inputs are made for the A/R and Inventory, the calculated weighted average for the total Weeks for each will be shown on the form. Use this information to complete the Future Years input form for the Weeks to Collect the A/R and the Weeks to Hold for Inventory in future years.
For Other Current Assets, Equipment, Buildings/Improvements, Real Estate, Other Long Term Assets and Goodwill, the User will enter the totals for each.
The Adjustment Inputs for the Existing Company Assets may be used to make adjustments or reorganizations of the Asset Items. This Input can be used to add amounts to adjust the Asset Item to reflect activity to a future date, such as the effective date for the Purchase of the Company.
For the years following the Asset Sale, the regular depreciation expense will continue but be reduced by an allocated amount representing the Sold Asset. The Sale Amount will be divided by an estimate for the remaining life for assets in that Asset Class which will reduce the annual depreciation expense amount for the Asset Class (ex: all assets booked as Machinery & Equipment). This adjustment is only an estimate and not based on specific asset removal as the exact year of original acquisition of the Sold Asset is unknown. An Adjusting Journal Entry may be made to Accumulated Depreciation, Depreciation Expense and Gain/Loss on Sale to make more specific adjustments.
Asset Sales are entered as a negative Capital Expenditure on the Capital Expenditure Input page listed in Step 7.
The negative number input used to represent Asset Sales should represent the proceeds from the Asset sale. In the ThruThink® analysis, the negative number entered as an Asset Sale will reduce the Gross Value of the Asset Class and increase Cash.
To fully represent the Asset Sale, multiple accounting style Adjusting Journal Entries (AJE) in Step 7 will need to be made to record the Gain (Loss) on Sale of Assets, the reduction of Accumulated Depreciation and adjust the Asset Value to reflect the removal of the Book Value of the asset instead of the proceeds from the sale. All gains from asset sales will be considered as Long Term Capital Gains (assets held over one year). Capital Losses from the Sale of Assets will be carried into future years to apply against future Capital Gains. No Capital Loss will be applied against Ordinary Income. For additional information see Help - Capital Gain.
When an Asset Sale occurs, if Adjusting Journal Entries are not made to record Gain (Loss) and adjustment to Accumulated Depreciation, all asset sales will be considered as net book value and no gain or (loss) will be recognized until the Asset Sale proceeds exceed the entire Asset Class value.
When proceeds from the Asset Sale exceed the Gross Value (prior to depreciation) of the Asset Class (ex: all assets booked as Machinery & Equipment), the Asset Class value will be reduced to zero and Accumulated Depreciation will recaptured and be counted as Ordinary Income and the excess sold value will be counted as Long Term Capital Gain. Adjusting Journal Entries in Step 7 may be made to adjust the Long Term Capital Gain to Ordinary Income.
For the years following the Asset Sale, the regular depreciation expense will be reduced by an allocated amount representing the Sold Asset. The Sale Amount will be divided by the Asset Class life years which will reduce the annual depreciation expense amount for the Asset Class (ex: all assets booked as Machinery & Equipment). Because these calculations are based on averages and not specific asset removal, the exact year of original acquisition of the Sold Asset is unknown. The specific associated depreciation for the Sold Asset should be considered approximate in nature.
Annual Write Off amounts for future years for Accounts Receivable and Inventory may be found in the Accounts Receivable - Future Terms Set-Up Input Page and the Inventory - Future Terms Set-Up Input Page . Write Off amounts for other asset categories may be made with an Adjusting Journal Entry to reflect write downs in asset value.
Book Value is defined as the net difference between the actual total assets and total liabilities on the Balance Sheet of the Company at the end of any given period. In this manner, assets are listed at cost less depreciation and will include all non cash assets such as Capitalized Goodwill (the amount over hard value of assets paid for the Company).
Book Value of an individual asset or asset category is the original cost of the asset or assets in the category less the accumulated depreciation or amortization expense for that individual asset or asset category.
Capital Expenditures are purchases of assets other than Inventory and Accounts Receivable. On the Cap Ex Input page, a positive number is used for purchases. Depreciation for Capital Purchases will be calculated using the factors in the Depreciation Set-Up page.
A negative number input is used to represent Asset Sales and should represent the proceeds from the Asset sale. In the ThruThink® analysis, the negative number entered as an Asset Sale will reduce the Gross Value of the Asset Class and increase Cash.
To fully represent the Asset Sale, multiple accounting style Adjusting Journal Entries (AJE) in Step 7 will need to be made to record the Gain (Loss) on Sale of Assets, the reduction of Accumulated Depreciation and adjust the Asset Value to reflect the removal of the Book Value of the asset instead of the proceeds from the sale. All gains from asset sales will be considered as Long Term Capital Gains (assets held over one year). Capital Losses from the Sale of Assets will be carried into future years to apply against future Capital Gains. No Capital Loss will be applied against Ordinary Income. For additional information see Help - Capital Gain.
When an Asset Sale occurs, if Adjusting Journal Entries are not made to record Gain (Loss) and adjustment to Accumulated Depreciation, all asset sales will be considered as net book value and no gain or (loss) will be recognized until the Asset Sale proceeds exceed the entire Asset Class value.
When proceeds from the Asset Sale exceed the Gross Value (prior to depreciation) of the Asset Class (ex: all assets booked as Machinery & Equipment), the Asset Class value will be reduced to zero and Accumulated Depreciation will recaptured and be counted as Ordinary Income and the excess sold value will be counted as Long Term Capital Gain. Adjusting Journal Entries in Step 7 may be made to adjust the Long Term Capital Gain to Ordinary Income.
For the years following the Asset Sale, the regular depreciation expense will be reduced by an allocated amount representing the Sold Asset. The Sale Amount will be divided by the Asset Class life years which will reduce the annual depreciation expense amount for the Asset Class (ex: all assets booked as Machinery & Equipment). Because these calculations are based on averages and not specific asset removal, the exact year of original acquisition of the Sold Asset is unknown. The specific associated depreciation for the Sold Asset should be considered approximate in nature.
Goodwill is found on the Balance Sheet in the Amortized Assets Asset category.
The amount paid for the Company that exceeds the Value of the Company's Assets at the time of purchase will be capitalized to Amortized Asset category as Goodwill on the Balance Sheet.
The Goodwill amount as capitalized as an Asset will be shown on the post closing Balance Sheet and amortized to expense over a period of time selected by the User.
If there is a Performance Earn Out Note considered as part of the purchase price of the Company, each year, if the Earn Out Note fluctuates (such as due to the future performance of the Company) and changes the ultimate price paid for the company, the Goodwill (the revised Purchase Price due to the change in the Earn Out Note in excess of the value of the assets at the time of purchase) will be adjusted to reflect the increase or decrease in the amount paid for the Company (which reflects the amount of the Performance Earn Out Note).
Purchase the Target Company
When purchasing the Target Company, the Target Company's Sales, EBITDA, the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Target Company are entered on the Transaction Sheet through the inputs in Step 3, 5 and 6. The Equity Structure for the ownership of the Target Company is entered in Step 8 for the purchase and will flow to the Transaction Sheet.
Purchase the Existing Company
When purchasing the Existing Company, the Existing Company's Sales, EBITDA, Assets and Liabilities are entered for the Existing Company options in Steps 3, 5 and 6 and the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Existing Company is for the Transaction Sheet options in Step 3, 5 and 6. The Equity Structure for the purchase is entered in Step 8 and will flow to the Transaction Sheet.
When purchasing the Existing Company, the Debt and Equity required to acquire the Existing Company should be entered using the Transaction Sheet options. This is new acquisition debt as well as new Existing Company debt (after the Effective Date). In this manner, for example, if there are assets at the Existing Company that can be used for additional debt after the Effective Date, the additional debt should be entered on the Transaction Sheet and those proceeds as well as Equity Debt and or the Contributions from outside Equity will become part of the capital structure assembled to acquire the Existing Company. After the acquisition, all the debt and equity from both the Transaction Sheet and the Existing Company will be rolled into the post closing Balance Sheet.
Existing Company Purchases the Target Company
When the Existing Company is purchasing the Target Company, the Transaction Sheet option is used for the Target Company Information and the Existing Company option is used for the Existing Company in Steps 3, 5 and 6. The Existing Company must be listed (using exact Existing Company name) as one of the Equity Partner Groups through the Equity inputs in Step 8. Any cash required of the Existing Company as an Equity Group will be taken from the cash listed on the Existing Company Input page. If there is not enough cash in the Existing Company's balance sheet, the Existing Company Equity Group cash contribution above the cash shown on the Existing Company Balance Sheet will not be allowed as a cash input on the Transaction Sheet Equity input.
Because information from the Transaction Sheet and the Existing Company Sheet are combined into the post Closing (Effective Date) Balance Sheet, if the Existing Company is purchasing the Target Company both the Sales and EBITDA information entered in Step 3 for the Existing Company and the Target Company will become the base information going forward as of the close of escrow or the Effective Date. Care should be taken not to duplicate and Sales or EBITDA information between the Target Company and the Existing Company.
As noted above in purchasing the Existing Company, when the Existing Company is Purchasing the Target Company, if there are assets at the Existing Company that can be used for additional debt to acquire the Target Company, the additional debt should be entered using the Transaction Sheet option and the proceeds will become part of the capital structure assembled to acquire the Target Company. The Transaction Sheet Debt will be combined with the Existing Company Debt after the Effective Date (Acquisition Date). The additional debt the Existing Company raises on its own assets as well as the assets of the Target Company and equity debt/contributions from the Equity Groups to provide cash to purchase the Target Company can be seen on the Information Tab Transaction Views through the Transaction Deal Structure and Transaction Buyers and Sellers Statement.
The Individual Item Schedule is intended to provide the User the option of identifying in more detail six separate specific items for Securities/Notes Receivables.
On the Individually Scheduled Item Input page, there are four separate repayment options, Interest Only, Amortized Level Payment, Level Principal plus Interest.
For each Item, the User may direct the Item to flow to one of the following choices (Show On choice):
1. Transaction Sheet
Choosing the Transaction Sheet for the Show On selection will send the individual Item to the Transaction Sheet to be used however the Transaction is being used, ("Purchase the Target Company", "Purchase the Existing Company" or "The Existing Company Purchases the Target Company"
2. Existing Company
Choosing the Existing Company for the Show On selection will send the individual Item to the Existing Company Input Section to be included in the Beginning Existing Company Balance Sheet.
When purchasing the Existing Company, sending an asset to the Transaction Sheet will be an asset in addition to the Existing Company. The transaction Sheet asset will be added to the Existing Company asset after the Effective Date.
3. Existing Company Sheet-Adjustment
Choosing the Existing Company-Adjustment for the Show On selection will send the individual Item to the Existing Company Input Section but put it into the Adjustment Column next to the Beginning Existing Company Inputs. The purpose for the Adjustment is to allow the user to add asset Items to the Existing Company in order to "restructure" the Beginning Existing Company asset structure.
This becomes useful when an existing Company Asset needs to be used with a new structure in accordance with a restructure plan. In this manner, the restructure happens before the Effective Date and the future years will reflect the results of the new restructure.
Year of Funding
This indicates the year the loan is funded. For the Beginning Effective Date, it can be left blank or a '0' can be entered. A '1' would indicate the loan is funded during Year 1, etc.
For Monthly cash flow purposes, loan funding will be at the mid point of the year indicated. Accrued interest for the remaining half of the year will be calculated and included in Accrued Interest Income and Accrued Interest Receivable on the Balance Sheet.
Funding Month
If Loan is funded during Years 1-3, User may identify which month during those years the Loan is funded.
If no month is indicated, the loan will be funded in month 12 in the Year indicated by default.
Remaining Payments
Insert # of actual payments left for the life of the loan up to a maximum of 240 payments. If left blank, 20 years of payments will be used.
Type of Payment
0=Interest Only with no principal paid,
1=Amortize-Level payment containing both principal & interest over the term of the loan,
2=Level Principal Payment plus Interest,
3=Interest Only with all of the principal paid with last payment (balloon)
Payment for Amortized Loans, Principal amount for Principal plus Interest Loans
If, payment over the periods indicated is not enough to pay off principal & interest, the balance owed will be paid off in the last pay period. For amortized payment option, if no amount is inserted, an automatic calculation based on the factors given will be used. For Level Principal plus Interest, if no principal payment amount is inserted, interest only will be calculated.
Number of Payments per Year
Enter the number of payments/year (1-12). If # of Payments/Year is left blank, the default will be 1.
If the Remaining Payment entry is left blank, the default is 20 years of payments and there is a maximum of 240 payments allowed.
Month Payment is Due
For Annual Payments with Principal Only (Payment type #1 or 2)
This entry only will apply to a Note or Securities Receivable with annual payments (1 per year). For items other than annual payments, inputs for Month Due will default to month "12".
The Month the payment is due to be received is the Month # from the Effective Date, i.e., if the Effective Date is March 31 and the payment is due in June, then the Month Period Due would be 3.
For an entry prior to Month Period 12, accrued interest income and Accrued Interest Income Asset for the remaining periods of the year will be generated.
If the Month Due is prior to month 12, the total payment will stay the same, but the amount of interest income will vary and represent only the months of the year prior to and including the Month Due period. The balance of the payment will be principal and reduce the note receivable amount accordingly.
With a prior existing note receivable, accrued interest income receivable as an initial balance input should be entered as an Accrued Interest Income Receivable asset as of the beginning date in the Asset set up process. This would represent the months of the year after the last payment was received in the prior year.
If this is a prior existing note receivable, for annual payments only, input a Month Due greater than 12, the Start Month is the month the payment was last received last year plus 12. The interest received will be for the 12 months after last years Payment which will include the periods from the prior year. On an accrual basis, interest paid this year for the months of last year will be reversed out of Accrued Interest Income Asset and accrued Interest Income (See Interest Income detail). For example if there is a payment for an existing note receivable due in April (Month 4) this year and was last received in April of last year, use a month due of 16 (April = Month 4, 4 + 12 months back = 16). 12 months of interest will be received and become Interest Income and 8/12 of the Interest received will be reversed out or credited to Accrued Interest Income Asset and lower or debit Interest Income.
An automatic accrual entry will be made debiting Accrued Interest Income Asset and crediting Interest Income for the months after the Month Period Due for each Yr beginning with Yr 1. This input is then automatically reversed the following year. See Interest Income information page for the detail of these entries.
The Individually Scheduled Other Current Asset Items are interest bearing and will be automatically collected in the month indicated in the next fiscal year period unless annually renewed (see Annual Renewal below). If no month is indicated and it is not renewed, it will be collected in month 12. This type of asset is generally short term investments to be collected within 12 months. The Individually Scheduled Items can be applied to either the Transaction Sheet for the Target Company or directly to the Existing Company during the beginning asset setup for either the Target Company or Existing Company.
Annual Renewal
For the Individually Scheduled portion of the Other Current Assets, there is an annual selection on the Other Current Asset page (see Information Browser - Other Current Asset Balance Detail). For each year of the Horizon, by selecting 'Yes', the entire category will be renewed and the asset anniversaries will all be extended by 12 months.
This asset is represented on the Balance Sheet under Current Assets even if renewed every year. It will be considered due within 12 months at all times.
By entering accounts receivable amounts on the Individually Scheduled Accounts Receivable page, the form will setup and record the accounts receivable amounts as beginning Individually Scheduled Accounts Receivable for end of the period just prior to Year 1 (the Effective Date) and by entering the monthly information, it will indicate when the beginning accounts receivables are collected during Year 1.
This information will affect cash flow, but will not affect accrual income in Year 1 unless the User has chosen Cash as the tax basis and in that case this information will be income for Year 1.
Depending on the selection made, the accounts receivable amounts entered on this form, Section A, will feed to either the Transaction Sheet or the Existing Company financial information (the "Show On" selection) as beginning accounts receivable as of the Effective Date.
This form shows the Year 2 or Year 3 Beginning Individually Scheduled Accounts Receivable that were created in the prior year.
These amounts are accrual income in the prior year or cash basis income in the current year, depending on User selection for tax basis. Any adjustments needed for this information need to be made in the prior year Section D Individually Scheduled Income.
There is no User input on this form and is for informational purposes only.
By entering inventory amounts in this page, the form will setup and record the inventory amounts as beginning Individually Scheduled Inventory for the end of the period just prior to Year 1 (the Effective Date) and by entering the monthly information, it will indicate when the beginning inventory is to be used during Year 1.
This information should be listed at cost.
Depending on the selection made, the inventory amounts entered for Year 1 Section B Inventory, will feed to either the Transaction Sheet or the Existing Company financial information (the "Show On" selection) as beginning inventory as of the Effective Date.
For every entry for the Year 1 Schedule B Inventory, the User must make an entry for the Sale Value of the Inventory used. This is the value for which the Inventory being taken out of inventory and used on this page will be sold. Each time an entry is made on this page, the User will be prompted for the Sale Value. If there is an existing Sale Value for this item, it will be shown on the prompt and the User may change or accept that amount. If there will be no Sale Value for the Inventory used, a '0' must be entered for the Sale Value. Each individual input for Sale Value on this page will flow to the Individually Scheduled Section D Income.
This inventory was created from Capitalized Expenses in Section C from the prior year Individually Scheduled Expense inputs. This will indicate when this inventory is to be used during the year.
This information is simply a allocated spread of the totals indicated.
For every entry for Year 2-3 Section B Inventory, the User must make an entry for the Sale Value of the Inventory used. This is the value for which the Inventory being taken out of inventory and used will be sold. Each time an entry is made on this page, the User will be prompted for the Sale Value. If there is an existing Sale Value for this item, it will be shown on the prompt and the User may change or accept that amount. If there will be no Sale Value for the Inventory used, a '0' must be entered for the Sale Value. Each individual input for Sale Value on this page will flow to the Individually Scheduled Section D Income.
This entry only will apply to a Note or Securities Receivable with annual payments (1 per year). For items other than annual payments, inputs for Month Due will default to Month "12".
The Month the payment is due to be received is the Month # from the Effective Date, i.e., if the Effective Date is March 31 and the payment is due in June, then the Month Period Due would be 3.
For an entry prior to Month Period 12, accrued interest income and Accrued Interest Income Asset for the remaining periods of the year will be generated.
If the Month Due is prior to month 12, the total payment will stay the same, but the amount of interest income will vary and represent only the months of the year prior to and including the Month Due period. The balance of the payment will be principal and reduce the note receivable amount accordingly.
With a prior existing note receivable, accrued interest income receivable as an initial balance input should be entered as an Accrued Interest Income Receivable asset as of the beginning date in the Asset set up process. This would represent the months of the year after the last payment was received in the prior year.
If this is a prior existing note receivable, for annual payments only, input a Month Due greater than 12, the Start Month is the month the payment was last received last year plus 12. The interest received will be for the 12 months after last years Payment which will include the periods from the prior year. On an accrual basis, interest paid this year for the months of last year will be reversed out of Accrued Interest Income Asset and accrued Interest Income (See Interest Income detail). For example if there is a payment for an existing note receivable due in April (Month 4) this year and was last received in April of last year, use a month due of 16 (April = Month 4, 4 + 12 months back = 16). 12 months of interest will be received and become Interest Income and 8/12 of the Interest received will be reversed out or credited to Accrued Interest Income Asset and lower or debit Interest Income.
An automatic accrual entry will be made debiting Accrued Interest Income Asset and crediting Interest Income for the months after the Month Period Due for each Yr beginning with Yr 1. This input is then automatically reversed the following year. See Interest Income information form for the detail of these entries.
This provision is intended for the User who is a Buyer of the Company to Write Off a percentage of the initial Asset value that is being paid to the Seller of the Company to reflect general confidence issues with the asset at the time of purchase or analysis.
If a certain value must be paid to the Seller, however the User (Buyer) doubts the value used for the asset, the User can write off a portion of the beginning value but not change the Purchase Price paid to the Seller. The value after the Write Off will flow into the post closing Balance Sheet.
The Input is a Percentage of the value being paid to the Seller of the particular Initial Asset Value.
The Initial Write Off will reduce the initial value of the asset by the % of the Write Off. The write off will apply to the applicable balances of the indicated asset for either the Transaction Sheet or the Existing Company financial input sheet. The Write Off will be applied in the pre-closing transaction and adjust the beginning balance of the first period. It should be considered as an adjustment to the beginning basis value of the assets involved. It will not have an effect on net income or loss.
The effect of the Write Off will be to increase the Goodwill paid for the Company.
This input is available on the Transaction Sheet Asset Input page for the major asset categories and is found in Step 5.
This provision is intended for the User who is a Buyer of the Company to Write Off a percentage of the initial Asset value that is being paid to the Seller of the Company to reflect general confidence issues with the asset at the time of purchase or analysis.
If a certain value must be paid to the Seller, however the User (Buyer) doubts the value used for the asset, the User can write off a portion of the beginning value but not change the Purchase Price paid to the Seller. The value after the Write Off will flow into the post closing Balance Sheet.
The Input is a Percentage of the value being paid to the Seller of the particular Initial Asset Value.
The Initial Write Off will reduce the initial value of the asset by the % of the Write Off. The write off will apply to the applicable balances of the indicated asset for either the Transaction Sheet or the Existing Company financial input sheet. The Write Off will be applied in the pre-closing transaction and adjust the beginning balance of the first period. It should be considered as an adjustment to the beginning basis value of the assets involved. It will not have an effect on net income or loss.
The effect of the Write Off will be to increase the Goodwill paid for the Company.
This input is available on the Transaction Sheet Asset Input page for the major asset categories and is found in Step 5.
Inventory is unused material and supplies used to create finished product as well as unsold finished product.
Inventory includes Work in Process which will include allocated manufacturing labor as well as the direct materials and supplies of unfinished Finished Product.
Unsold completed Finished Product Inventory includes allocated direct manufacturing labor as well as the direct materials and supplies.
Cash paid to create inventory (see Inventory - Future Terms Set-up) or User capitalized expenses (see Info Browser - Individually Scheduled Income/Expense, Capitalized Expenses) is counted as an Inventory Asset and not counted as an Expense in either the ThruThink® Accrual or Cash Basis method of accounting (see Info Browser - Tax Rates). Therefore when the User chooses the ThruThink® Cash Basis for calculation of income taxes, cash paid for inventory will not be counted as an expense for income tax purposes.
Inventory Replenish
When Inventory is written off, including the Initial Inventory at the time of Company acquisition, the User can specify how much should be replenished the next year and how many weeks it should take to replenish.
The Year 0 Inputs pertain to the Initial Inventory write off at the time of Company Acquisition (See Asset Input page).
For the Weeks to replenish, enter a whole number between 0 and 52. Specific calculations only are made for years 1-3. Week to Week calculations are only made for Years 1-3.
The Inventory replenish amount is in addition to the normal amount of inventory being generated for the current year sales therefore there it causes a greater demand on cash flow. The greater amount to replenish and the shorter time desired, the greater impact on cash flow requirements.
COGS to be Inventoried
Generally when a product is manufactured or purchased for resale, the cost of the item will be put into inventory as an asset. When the item is then sold, or combined with other items and sold, the cost of the item(s) will be taken out of inventory and expensed as a part of Cost of Goods Sold (COGS).
The total COGS for the item sold however will also contain other costs that are incurred at the time of sale such as packaging, shipping etc. The percent of COGS to be inventoried therefore is the percent of the total COGS that are expenses purchased for inventory to be used at a later date.
Beginning Inventory
This is the average time over which the Inventory will be held for use. Use will be evenly over this time. This will apply to Beginning Inventory balances only, after which, the input for Future Ave Weeks to Hold will be used for the Horizon Years. If there is no selection for the future years, the default for future years will be the selection indicated for the initial inputs on the Transaction Sheet. If this is left blank, 0 will be used and no inventory will be held for use.
If the Existing Company is purchasing the Target Company, for Year 1, a weighted average will be calculated between the Weeks to Hold listed on the Transaction Sheet for the Target Company and the Weeks to Hold listed for the initial input for the Existing Company. For Years after Year 1, the selections in the Ave Weeks to Hold in the Future Input will be used with no weighted average calculation. If there is no selection indicated in the Transaction Sheet, the initial input for the Existing Company will be used for future years.
This Input is found in the Inventory Set Up pages for the Transaction Sheet and the Existing Company Inventory Beginning Balances.
Inventory Future Weeks to Hold
This will apply for future Horizon Period years selected by the User.
Weeks to Hold are the number of weeks on average that will be Inventory is required to be kept on hand (not used).
For example, with Inventory, if cash is used to manufacture or purchase Inventory and is sold 30-60 days later, then the Weeks to Hold should be 6.
This input is found in the Inventory - Future Terms Set-Up Input page
The Input should be a whole number and not a portion of a week.
Origination Points as used in the ThruThink® analysis are fees charged by the lender for multi year loans at the time of origination of the loan. Fees are often expressed as Points and one Point equals 1% of the loan. If there is a straight dollar amount for a fee, include this fee as an a Transaction Expense and Due Diligence Fees under the Step 7 Inputs.
In the ThruThink® analysis, Origination Points are amortized and added to the Amortized Assets on the Balance Sheet along with the Transaction and Due Diligence Expenses and amortized over the Years for Goodwill and Transaction Expenses in the Tax Rate and Depreciation Input page. This means that Origination Points are not expensed in the year paid, but expensed over the life of the Amortized Asset as Amortization Expense.
If this is a fee to be charged annually, it should not be included as Origination Points, but included as an Operating expense for Year 1 and thereafter if applicable.
Origination Points are only an option for the individual Transaction Sheet Loans. The Individually Scheduled Debt Items do not have the option to specify Origination Points. An AJE may be made to Amortized Assets for this purpose however.
Other Current Asset is considered short term collectable within 12 months and can be reported with two methods; 1) a general category of Other Current Asset can be reported for the Transaction Sheet and the Existing Company and 2) more detailed information with interest rate and payment timming may be reported on the Individually Scheduled Other Current Asset input forms.
The User may make a manual input on the Other Current Asset using the Cash Flow Control page for unique annual activity. All Cash Flow Control adjustments will be 1st applied to the Individually Scheduled portion of the Other Current Asset activity and then the remainder to the general category of Other Current Asset.
The general category of Other Current Asset inputs on the Transaction Sheet and the Existing Company asset input forms are for general miscellaneous assets due within 12 months. It is non-interest bearing and can only be adjusted in future years by the adjustment on the Cash Flow Control or an Adjusting Journal Entry to that account. For interest bearing items for the Existing Company, the User can use the Individually Scheduled Item form, as described below.
The Individually Scheduled Other Current Asset Items are interest bearing and will be automatically collected in the month indicated in the next fiscal year period unless annually renewed (see Annual Renewal below). If no month is indicated and it is not renewed, it will be collected in month 12. This type of asset is generally short term investments to be collected within 12 months. The Individual Scheduled Items can be applied to either the Transaction Sheet for the Target Company or directly to the Existing Company during the beginning asset setup for either the Target Company or Existing Company. The month selection will only apply during years 1-3.
All activity for the General Other Current Assets on the Transaction Sheet and the Existing Company will take place at the end of the indicated year.
Annual Renewal
For the Transaction Sheet Input, if "Yes" is selected in the Annual Renewal Box, the Other Current Asset balance will be renewed each year of the Horizon Period and will not be automatically received. It will still be considered a short term asset but renewed each year.
Annual renewals are made on the Other Current Asset Balance Detail page and those annual renewal selections will override the Transaction Sheet selection described above. If "Yes" is selected in the Annual Renewal Box on the Current Asset Balance Detail page for any of the years, the Other Current Asset balance for both the Transaction Sheet and the Individual Scheduled Other Current Asset amounts will be renewed and will not be automatically received in the renewal year selected. It will still be considered a short term asset but renewed each year.
Turning renewals on or off will only effect the Interest Bearing Portion as the Non Interest Portion is automatically renewed until adjusted with an Adjusting Journal Entry (AJE) see below.
If only a portion of the Other Current Asset is to be renewed, the User can make a manual payment on the Other Current Asset using the Cash Flow Control page for that portion of the asset that is not renewed.
This asset is represented on the Balance Sheet under Current Assets even if renewed every year. It will be considered due within 12 months at all times.
Repayment or Draws
Collections or Advances for the Other Current Assets can be made manually by the User by making receipt or advance for this asset using the Cash Flow Control page. Additionally, an AJE may be made by the User adjusting the balance of the general category of the Other Current Asset through the Adjusting Journal Entry process.
Advances made to the Other Current Asset category using the Cash Flow Control page are applied to the Individually Scheduled Other Asset category and will occur at the end of the indicated year and accrue interest and be collected in the same manner as the average of all the Individually Scheduled Other Current Asset items in the indicated year. If there are no Individually Scheduled Asset items, the advance will be paid off with no interest at the end of the year indicated unless renewed as described above.
If this asset is due in a period longer than 12 months from the Effective Date, the User should choose the long term Note/Securities category for this asset. In this manner, this asset will be then considered a Long Term Asset on the Balance Sheet.
General Other Current Asset - Non-Interest Bearing Portion
The general category of Other Current Assets for both the Transaction Sheet and the Existing Company do not accrue interest.
The General Other Current Asset, non-interest bearing category can be used for non Accounts Receivable type of items that can be entered in a lump sum amount. This may be useful since Accounts Receivable is not necessarily a direct User Input but calculated from sales activity based on User Input factors.
Items such as Prepaid Expenses can be represented on this page and adjusted with Adjusting Journal Entries going forward.
Adjusting Journal Entries (AJE)
An AJE may be made only to Other Current Assets will only effect the General Other Current Asset category but will only effect the general category of Other Current Asset and not effect the Individually Scheduled Other Current Asset amounts. All AJE activity will take place at the end of the year.
An AJE entry to this account will directly effect cash but will have no effect on income/expenses or tax calculations either cash basis or accrual basis.
Because inputs to this account will effect cash, the User will need to be careful to insure that this is the intended effect. An AJE to another Account with the opposite sign may need to be made to offset this cash effect.
The cash flow impact of an AJE to Other Current Asset will be contained in the Non-Expense Adjusting Journal Entry cash flow line item in the Cash Flow Control form.
In a Company purchase, are there any real estate, buildings, improvements or fixed in place equipment (Real Property) that the Company will require and not be purchased as part of the Company sale. This is often the buildings and real estate that the Seller or another party will continue to own after the sale of the Company or that the Company will lease from another party.
Very often the value of a Company can be looked at as if there are two types of assets, real estate (including buildings) and the business operations.
A Company purchase includes the value of the "operation", but can very often not include the Real Property. In the case of the latter, the Company can be moved to a new location or the new owner can lease the Real Property from the Seller.
In either case, if these assets materially contribute to the operations of the Company, a lease expense for the Real Property that the Seller will retain should be added to the Company's expenses to represent the value of these assets. An input for this purpose is available in Step 7.
Personal property is considered movable equipment and real property is fixed equipment, real estate, buildings and improvements.
Often, the definition between some assets as real property or personal property become becomes somewhat vague. Many taxing authorities apply property taxes differently between the two categories.
For the purposes of the ThruThink® analysis, Real Property is fixed permanent assets such as Real Estate, Buildings and Improvements.
Capitalized Acquisition Costs are the costs associated with the purchase of the Company such as legal expense, due diligence expense (the expenses for investigating the purchase of the Company prior to the purchase) and new entity set up fees. These expenses, although paid in cash at the time of the Company purchase, will be "Capitalized" and become an asset on the Balance Sheet that will be expensed over time (amortized) instead of being an expense in the year that it was paid.
For Hard Asset Value considerations, the "value" of the Capitalized Acquisition Costs will not be used as it is not considered a Hard Asset recoverable in a net asset liquidation of the company.
The Balance Sheet represents the post Effective Date or Post Closing Balance Sheet of the Transaction. If this is to Purchase the Target Company, the Balance Sheet will reflect the post closing Balance Sheet of the Target Company after being purchased. The Balance Sheet is presented on the Accrual Basis.
For the purchase or analysis of the Existing Company, the Existing Company's Balance Sheet is entered into the Existing Company Beginning Balance Sheet using the Existing Company Asset and Debt Input pages. The Post Effective Date Balance Sheet will be the Balance Sheet after the closing of the transaction which will reflect the amortized Transaction Expenses, Goodwill of the purchase and any Asset write-offs, adjustments or restructures from the Existing Company Beginning Balance Sheet.
When the Existing Company Purchases the Target Company, the post Closing Date Balance Sheet will bring together the Target Company acquisition and the Existing Company Beginning Balance Sheet after the closing of the transaction which will reflect the amortized Transaction Expenses, Goodwill of the purchase and any Asset write-offs, adjustments or restructures from the Existing Company Beginning Balance Sheet. Any cash required from the Existing Company to purchase the Target Company will be deducted from the Existing Company's Beginning Balance Sheet cash. If there is insufficient Existing Company cash to complete the Transaction, an error will show on the Equity Input Page.
The Restructure Process is only used with the Existing Company and allows the User to represent an item on the original Existing Company Balance Sheet and then "restructure" the item on the balance sheet before the Effective Date. It is intended that this be matched by a corresponding Adjustment addition to the Balance Sheet using one of the Individually Scheduled Debt or Asset Item Inputs making the "Existing Company-Adjustment" Show On selection for that item which will then cause the Adjustment addition to show up in the "Adjustment Column" on the Existing Company Balance Sheet. This will take place before the Effective Date or before closing of escrow. This is simply to show a "detail trail" for pre Effective Date adjustments or restructures. The Adjusted Balances are the only ones subsequently used in the analysis.
The primary function for this process is intended to illustrate a "Restructure Plan" of Short Term Debt, i.e. A/R, Inventory or Other Current Debt to Long Term Debt in order to increase Working Capital.
The Annual Budget Feature is a summary of the Individual Scheduled Income and Expense Inputs from Step 3, a summary of the cash flow by month, a summary of the Balance Sheet and some key performance indicators.
The User may select Year 1, 2 or 3 to produce a separate Annual Budget for each of those years.
The 13 Week Cash Flow Forecast provides the User the ability to select any month in Year 1 which will then display from the beginning of the month selected, the next 13 Weeks cash flow activity reflected in the Projections. See Information Menu - 13 Week Cash Flow Forecast.
The Annual Budget Feature is a summary of the Individual Scheduled Income and Expense Inputs from Step 3, a summary of the cash flow by month, a summary of the Balance Sheet and some key performance indicators.
The User may select Year 1, 2 or 3 to produce a separate Annual Budget for each of those years.
The Cash Flow Control page lays out the Cash Flow for Horizon Years chosen by the User. This form reflects the cash flow results from the User Inputs from the Step Process. If those inputs are satisfactory, no additional input on this form is required.
The rows with yellow input boxes are available for the User to make manual adjustments or additional inputs. The Cash Flow Input page is dynamic which means the User may scroll the page and watch the effect on the page as the adjustments are entered. In this manner, as adjustments for Sales, COGS, Overhead Expenses, Debt payments, Capital Expenditures and non business cash payments are entered, the effect on the annual and cumulative Cash Balance listed both at the Top and Bottom of the page can be observed.
The page provides the ability to manage cash by making extra debt pay downs or drawing on loans as cash flow dictates and allows.
The income tax expense will reflect the Inputs made by the User which may be observed on the Cash Flow Control page.
Beginning Working Capital Cash is the amount of cash required for working capital at the close of escrow or the Point of Reference Date (Effective Date).
The amount of this number is highly influenced by the cash flow generated by the Company prior to the Effective Date. If the Company has a good predictable stable monthly cash flow, this number can be lower. If on the other hand the Company is a Start Up, has a history of minimal or negative cash flow, the amount Beginning Working Capital Cash required will be larger.
The Beginning Working Capital Cash will become a requirement of cash along with the other cash requirements of the purchase escrow and will be a Use of Cash that determines the amount of Debt and Equity required to complete the Company purchase.
To determine the amount of Beginning Working Capital Cash required, complete the inputs into the ThruThink® analysis without the Beginning Working Capital Cash and check the cash flow results for the foreseeable future years. If the Cash Balance is or becomes minimal or negative but recovers after an appropriate period of time, this will be a guide for the amount of Working Capital Cash required which will indicate the Beginning Working Capital Cash number.
If the Cash Balance is minimal or negative over a sustained period of time, the User should reconsider the underlying Sales/ EBITDA performance of the Company, the debt structure, the amount of Equity or a combination of all of those factors to see if the deal structure or the deal itself makes sense.
As used in the ThruThink® analysis, Non Expense Cash Flow refers to two separate items: (1) the Non Expense Cash Flow items coming from the AJE process that are not accounted for individually such as AJE's for principal payments on debt, etc. This Non Expense Cash Flow from the AJE's will flow to the Cash Flow Control and the Sources and Uses of Cash to be represented as cash flow requirements, (2) the Non Expense Cash Flow Items coming from the Non Cash Input page that can be used for Draws and Contributions.
Non Expense Cash Flow Input
Non Expense Cash Flow is any use of Company cash for non Company purposes. This use of cash is considered a Draw on Owners Equity and will simultaneously reduce the Company's Cash and Owners Equity.
Draws will not effect the Income/Expense and is not deducted for tax calculations.
When there is more than one Owner, the Draws will be allocated to each owner in the percentage of their Owners Equity. Draws to only one owner are not allowed.
A cash contribution may be made by entering a negative number. This will add to the Company's cash and increase the Owners Equity in the same percentage as each owners equity ownership.
Non Expense Cash Flow Items are entered by the User through the Non Expense Cash Flow Input page or through an AJE entry.
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The date and time listed on the upper left portion of the reports is considered the Current Date and is as of the last input entered by the User or if no inputs have been entered by the User during that ThruThink session it will signify when the project was opened in ThruThink®. This date and time is Pacific Time Zone adjusted for Daylight savings (PDT) or Standard (PST) time seasons.
When a report is sent out as a PDF, there will be a date and time listed in the lower left portion of the report and signifes when the report was generated and sent out as a PDF. It is shown as Universal Standard Time (UST) which is 8 hours ahead of Pacific Standard Time and 7 hours ahead of Pacific Daylight Time.
The Current Date is not the Effective Date that the User enters in Step 2 or the Existing Company Fiscal Year End Date in Step 3. Please refer to the Effective Date help topic for more information.
The Effective Date is entered in Step 2 and is referred to as the Point of Reference in the ThruThink® analysis or the beginning point of the analysis. If no date is entered in Step 2 then the Current Date (todays date) is used as the Effective Date. The Transaction Sheet, Target Company and Existing Company Balance Sheet items should all be as of the Effective Date. The Base Sales and EBITDA inputs in Step 3 should be as of the Effective Date.
For the Existing Company, in Step 3, there is an option to enter a date for the last Fiscal Year End for the Existing Company. If the Fiscal Year End Date is different than the Effective Date, there is an adjustment option in both the Asset and Debt Input pages that would allow amounts to be entered that would adjust the beginning Balance Sheet from the Fiscal Year End to the Effective Date. All beginning Asset and Debt amounts need to be as of the Effective Date making it much simpler to have the Effective Date be the same as the Fiscal Year End.
For the Target Company, there is no option for entering a Fiscal Year End, so the Effective Date in Step 2 should be the Date for all beginning Assets and Debt amounts for the Target Company.
Debt Service Coverage is expressed as a ratio called the Debt Service Coverage (DSC) Ratio. This can be calculated differently depending on what information is desired. To express the DSC Ratio as an indication of how normal earnings from the business can cover the debt payments, the DSC is calculated in ThruThink® by dividing the Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) from the business by the Total Interest Expense plus Principal payments on Long Term Debt. A common target for this calculation is 1.25:1. This calculation is found in ThruThink through the Information Browser - Sources and Uses of Cash.
Debt Service Coverage is often expressed as Cash Available for Debt Service which in ThruThink® is calculated on a Trailing Twelve Month (TTM) basis. If the User has entered the Actuals for Last Year and the Actuals for Year to Date This Year, the ThruThink® calculation uses the TTM EBITDA less the TTM Non Financed Capital Expenditures plus the TTM Capital Contributions and less the TTM Capital Draws and divides this by the Total TTM Interest Expense plus TTM Principal Payments on Long Term Debt. This latter calculation is often used by Lenders as a loan covenant. A common goal for this ratio is also 1.25:1. This calculation is found in ThruThink® through the Information Browser - Projection Guidance to Actual to Date.
It is a useful exercise for the User to see what the Projection shows for a Trailing Twelve Month Debt Service (TTM DSC) calculation for Year 1 by itself. This can be seen by when a blank is entered as the current month on the Projection to Actual Comparison Page (see Information Browser). Going back to the Projection Guidance to Actual to Date page, the TTM DSC calculation can by seen on the right portion of the page under Month 12.
Debt measured as a multiple of Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) is a method of putting the debt level of the Company in perspective with its earnings (expressed as EBITDA).
The amount of an acceptable EBITDA debt multiple will depend on a number of factors, one of which is the trend factor in EBITDA growth. A high confidence in EBITDA growth will justify a higher EBITDA Debt Multiple. Conversely, a lower confidence in EBITDA growth or a negative EBITDA growth history will indicate a lower level of acceptable EBITDA Debt Multiple.
For information reference purposes, a maximum Senior and Sub Debt EBITDA Multiple Goal may be entered through the Transaction Sheet Sub Debt Input page. This does not effect any calculations, but simply provides a point of reference on the EBITDA Multiple page and the Transaction Deal Structure page.
Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) reflects the Company's operating performance prior to the effect of interest, taxes and non cash expenses of depreciation and amortization and is commonly used as a measure of a Company's true performance from its operations.
Because interest is often a factor of the debt structure that is a separate (but related) issue from the earnings capability of the Company, taxes are assumed to be driven from the earnings of the Company and not part of the operations and depreciation and amortization are non cash expenses and at best, a guess as to the actual loss in value of fixed assets over time and use, EBITDA becomes a good indication of earnings from operations of the Company.
For Companies with a substantial investment in highly actual depreciable assets, care should be used to make sure that expenses for repairs reflect an appropriate amount to keep the assets in good condition and Capital Expenditures (CapEx) should be included in the Cash Flow Control Input area to represent an adequate asset replacement schedule. The assumption is that between the repair expense and the CapEx, the contribution value of the assets to operating earnings are maintained or improved.
This page will guide the User in entering growth projections derived from the Base Sales for Income and Expenses or growth projections for EBITDA (Earnings before Interest, Income Taxes, Depreciation and Amortization) derived from base EBITDA.
Using the EBITDA option will override any inputs made for Income/Expense as EBITDA is the net result of the income less expense.
Options for entering Income & Expense:
1). The User may make projections for Years 1-3 in the Historical Worksheet process. If after making these projections, the User will have the option to input the projections into the Cash Flow Control page, (if you do not know whether you did this, it is a very deliberate process that you probably will remember doing). If the User chose to input the projections from the Historical Worksheet into the Cash Flow Control, then the Step 3 input should be skipped.
2). The User may make % growth inputs over Base Sales on the Step 3 input page along with % of Sales inputs for expenses for each of the years 1-3 and one constant growth input that will be used for all remaining years of the Horizon period.
3). The User may make % growth inputs over Base EBITDA on the Step 3 input page for each of the years 1-3 and one constant growth input for EBITDA that will be used for all remaining years of the Horizon period.
4). There are override inputs available for each of these Step 3 inputs on the Cash Flow Control page and the User may choose to skip the inputs here and make projections for Income/Expense or EBITDA directly on the Cash Flow Control page. If inputs are made here, the User will continue to have the opportunity to make adjustments on the Cash Flow Control page which will then override inputs made on this page.
5). Detailed individual inputs for Income and Expense can be made by using the Individually Scheduled Item options on the Step 3 input page which will provide individualized input options that are not available on the Step 3 input page or on the Cash Flow Control page.
The Individually Scheduled Item results and all of the Income and Expense or EBITDA growth inputs on the Step 3 input page will show up separately and be included on the Cash Flow Control page. If these are subsequently overridden by inputs directly to the Cash Flow Control page, these inputs will no longer be visible from the Cash Flow Control page.
Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) reflects the Company's operating performance prior to the effect of interest, taxes and non cash expenses of depreciation and amortization and is commonly used as a measure of a Company's true performance from its operations.
Because interest is often a factor of the debt structure that is a separate (but related) issue from the earnings capability of the Company, taxes are assumed to be driven from the earnings of the Company and not part of the operations and depreciation and amortization are non cash expenses and at best, a guess as to the actual loss in value of fixed assets over time and use, EBITDA is a good indication of earnings from operations of the Company.
For Companies with a substantial investment in highly actual depreciable assets, care should be used to make sure that expenses for repairs reflect an appropriate amount to keep the assets in good condition and Capital Expenditures (CapEx) should be included in the Cash Flow Control Input area to represent an adequate asset replacement schedule. The assumption is that between the repair expense and the CapEx, the contribution value of the assets to operating earnings are maintained or improved.
EBITDA Multiple used as indication of Economic Value
After the Company's EBITDA is determined, the economic value of the operations of the Company is often expressed as a multiple of the Company's EBITDA. Generally this ranges from a low multiple of 2-3 to a high multiple of over 10 (for private companies). The actual multiple used is determined by how stable the present EBITDA is going forward given a certain risk level. If there is a good case that the EBITDA will increase substantially going forward at an acceptable risk level, then a higher multiple is justified. If on the other hand, the EBITDA growth is declining, a lower multiple is justified or the risk of EBITDA volatility is relatively high, the multiple should be lower.
EBITDA Multiple used as the Exit Strategy Value
EBITDA Multiples for a Market Value Sale of the Company can be set with the Step 7 - Exit Strategy Input page. The Exit Strategy page will allow the User to indicate a market value EBITDA Multiple as well as a Direct Market Value and exclude from the Market Value Sale certain asset categories on the Balance Sheet such as A/R, Inventory, Notes Receivable, Equipment or Real Estate.
An EBITDA Multiple can be set for one individual year at a time or for each year the balance of the Horizon Years. Using the EBITDA Multiple method of valuation provides an easy measure of value on an ongoing basis as it automatically reflects the performance of the company.
The Step 7 - Exit Strategy page indicates a Breakeven EBITDA Multiple. This is an estimated calculation to represent returning the Equity Groups investment. It is calculated by using the value of all of the Assets less the Cash balance. In addition, if there are cumulative net losses, the amount of those loses will be added back to represent a reimbursement of those losses.
The Cash balance of the Company as well as its Debt are not usually included in a Market Valuation, therefore for a net benefit from a Market Value Exit Sale, Cash is added to the Market Value and the Debt is subtracted along with any excluded assets described above.
The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period. The ThruThink Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value for the Exit Value at year 10, if there is not a Market Value available.
EBITDA Multiple - Breakeven Exit Sale
The Step 7 - Exit Strategy page indicates a Breakeven EBITDA Multiple for an Exit Sale. This is an approximate calculation to represent generally returning the Equity Groups investment. It is calculated by using the value of all of the Assets less the Cash balance. In addition, if there are cumulative net losses, the amount of those loses will be added back to represent a reimbursement of those losses.
The Cash balance of the Company as well as its Debt are not usually included in a Market Valuation, therefore for a net benefit from a Market Value Exit Sale, Cash is added to the Market Value and the Debt is subtracted along with any excluded asset categories on the Balance Sheet such as A/R, Inventory, Notes Receivable, Equipment or Real Estate.
A direct input for Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) may be entered. Since EBITDA is naturally derived as a result of Sales less COGS and Operating Expenses, a direct input for EBITDA will override all results from Sales less COGS and Operating Expenses. If this feature is used, all sales, COGS and Operating Expenses will be ignored or zeroed out. Any Inputs in the Individually Scheduled Sales Input page will also be ignored. Manually inputted Operating Expense adjustments inputted as well as Seller Lease Expense and Other (Income) Expense will however not be overridden by EBITDA Override inputs.
It is important to complete Base EBITDA input in Step 3 as that information will also be used as part of the Deal Evaluation process.
EBITDA for the Horizon Period items can be entered by the User in three different ways:
1. A Percent Increase over the beginning or previous Years EBITDA in Step 3
2. A Cash Flow Control page override adjustment as a Percent Increase over the beginning or previous Years EBITDA input. The % Growth for EBITDA entered in the Cash Flow Control page will override the Step 3 % inputs.
3. A Cash Flow Control page override adjustment as a Whole Number input. A Whole Number input for EBITDA on the Cash Flow Control form will override both the Step 3 and Cash Flow Control % EBITDA inputs.
When an EBITDA override is used, if there is beginning A/R and Inventory balances, these same balances will be used at the end of all subsequent years. A/R and Inventory will decrease by the amount set to write off each year, otherwise will stay constant from year to year.
When an EBITDA override is used, if there is beginning Accounts Payable (A/P), A/P will stay constant from year to year.
When the Existing Company is being purchased or the Existing Company is purchasing the Target Company, EBITDA inputs from both the Transaction Sheet and the Existing Company will be combined. Care should be taken not to duplicate amounts.
When the Existing Company is being purchased or the Existing Company is purchasing the Target Company and EBITDA growth Inputs are made for each, EBITDA calculations can be kept separate on the Cash Flow Control page. If no percent is entered for Year 1 or after year 1, if there is a break in the annual growth Inputs (no input or by using Sales less, expense method or using a Whole Number override) any subsequent Percent growth entries after the break in this page will be ignored.
If no growth is desired, to avoid a break, a "0" for no growth can be entered and will be considered an Input and maintain the same number as the prior year.
A break will cause the Transaction Sheet EBITDA and the Existing Company EBITDA to be combined. Once the Transaction EBITDA and the Existing Company EBITDA become combined, the subsequent separation becomes unavailable which causes the subsequent separate EBITDA Growth Inputs by Target Company or Existing Company to be ignored. Adjustments are then made using the Whole Number or % EBITDA Inputs that will adjust the Total EBITDA.
The Maximum Senior and Subordinated Debt EBITDA Multiple refers to a maximum multiple of total Senior Secured Debt and Sub Debt divided by the Company's EBITDA. This often is a guide that Sub Debt Lenders use to measure their comfort for the upper limit of the Company's debt capacity.
The Max EBITDA Senior and Sub Debt Multiple Input is found on the Transaction Sheet Sub Debt Input page. It is a goal number for informational purposes and does not effect any calculations. The actual multiple for the Transaction Sheet Sub Debt will be reported on the Transaction Page for reference purposes.
When the Transaction Deal Structure does not provide the required amount of capital either through Debt or Equity, there will be an "Additional Funds Required" amount shown on the Transaction Sheet Deal Structure. If the Equity holders in the Deal own 100% of the equity of the post closing company (Step 8), the additional funds required will flow to the Equity Section of the Balance Sheet as assumed equity provided and will be shown in a separate line of the Equity Section of the Balance Sheet as "Additional Funds Required".
If the Equity holders in the Deal are not purchasing 100% of the equity of the post closing company (Step 8), i.e. they are only purchasing a portion of the Company, the additional funds required will not flow to the Equity Section of the Balance Sheet as the post closing Balance Sheet represents 100 % of the Company. Because the purchase is less than 100% of the Company, the Deal Transaction is between the old equity holders and the new equity holders and will occur outside the Company's post closing balance sheet. Therefore the "Additional Funds Required" is only for information purposes.
Buyer Value Exceeds Transaction Price
When the net value of the hard assets acquired in the deal exceed the purchase price of the deal, an adjustment is made in the Equity section and listed under Asset Value Adjustment.
Target Company Asset Value
When the Target Company is being purchased and the Buyer chooses to write down the value for one or all of the individual asset categories of the Target Company during the Transaction or prior to the Effective Date, the amount of the write off will reduce the beginning asset value in the post transaction Balance Sheet. When less than 100% of the Target Company is being purchased, the post closing Balance Sheet will still reflect 100% of the Target Company (net of write offs). In order not to dilute the non seller equity interest, no debt other than to increase the Company's working capital cash is allowed to be added to the post transaction Balance Sheet. Therefore, when less than 100% of the Target Company is purchased, the Equity section of the post closing Balance Sheet will simply be the net value of the Target Company's assets (net of any initial write downs) and be shown as an Equity Asset Value Adjustment.
Existing Company Asset Write Down
When the Existing Company is being purchased and the Buyer chooses to write down the value for one or all of the individual asset categories of the Existing Company during the Transaction or prior to the Effective Date, the amount of the write off will reduce the beginning asset value in the post transaction Balance Sheet. If 100% of the Existing Company is being purchased, the asset write off amounts for the Existing Company assets will increase the Goodwill amount the Buyer paid for the Existing Company which is booked on the post transaction Balance Sheet under Amortized Assets. When less than 100% of the Existing Company is being purchased, the Goodwill of the purchase does not get booked to the post transaction Balance Sheet of the Company as the transaction is considered outside the Company (between buyer and seller). The reduced asset values from the write off is booked to the Equity section of the post transaction Balance Sheet under Asset Value Adjustments. This write off occurs prior to the Effective Date and no tax considerations from the write off are included in this process.
Equity Adjustments after the Effective Date come from Non Expense Cash Flow items such as Draws, Contributions or Dividends made through the Non Expense Cash Flow page or by AJE entries.
For Existing Company Beginning Balance Sheet Only
Warning: Equity adjustments are unusual and not recommended. They should only be made by those who thoroughly understand the accounting and tax implications!!
The Adjustment column can be used for adjustments to the individual items or for eliminations when combining companies.
When adding or subtracting items in the Adjustment column, the total of the column should add to "0". In other words, for every positive number inserted for an asset, a like negative number or numbers should be inserted for another asset or a like positive number inserted for a liability. Same is true for liabilities. Adding to a liability will offset adding to an asset and vice versa. If there is no corresponding asset or liability entry, then the Equity adjustment can be used. The equity adjustment should not be used unless absolutely necessary. If there actually needs to be an equity adjustment, enter it on the Equity adjustment line, however all equity adjustments are subject to a Deferred Tax Liability or Deferred Tax Credit which will be shown on this line, unless the user makes the selection on the Existing Company Initial Balance Sheet to not calculate the tax liability or credit. If not overridden by a "Yes" selection, the tax liability will be created on the Existing Company Initial Balance Sheet and can be paid by a User generated Adjusting Journal Entry to Deferred Tax Liability (as a cash flow item, but not as an expense).
After any asset or liability adjustment is made, the impact on Equity will be shown as Equity Adjustment Needed. Enter that number into the Equity Adjustment Input Box being careful to replicate the sign (positive or negative) for the Equity Adjustment. The Equity Adjustment Needed number should now be '0'.
Select 'Yes' on the Equity Adjustment Input page (found in the Existing Company Debt Input page or in the Equity Section of the Existing Company Beginning Balance Sheet) to calculate the income tax liability or credit for the adjustment to equity indicated. By selecting 'No', the User chooses not to calculate a tax liability or credit on the adjustment to Equity. User understands that most equity adjustments that come from adjusting Asset or Liability accounts will generate a Gain or Loss that will have an effect on income taxes.
If 'Yes' is chosen on the Equity Adjustment Input page, the tax liability on this adjustment will be calculated and the actual equity change will be the net between this entry and the added Deferred Tax Liability.
If 'Yes' is selected, the Equity Adjustment will generate a Deferred Tax Liability or Deferred Tax Credit which can be paid by a User generated Adjusting Journal Entry.
By selecting 'No" on the Equity Adjustment Input page, no tax liability will be calculated for the Equity Adjustment.
When considering the Equity Group Return, the initial investment for the Equity Group will include the amount contributed or distributed to/from the amount of any cash contributed as Equity Notes, along with the amount of any Seller Notes if the Equity Group is part of the Seller.
As a return on the initial investment, the annual cash returns from interest and principal payments on Equity Notes, Seller Notes if the Equity Group was part of the Seller. In addition annual equity draws or contributions will be used as annual returns. In the last year of the Horizon period or Exit Year, the Equity Group's share of the Company Equity as well as any Gain form a sale (less Long Term Capital Gain tax) will be attributed to the Equity Group.
In some cases the total of the individual Equity Groups net Contribution will not add up to the Total of the Equity Groups portion of the Company Equity. This will occur because of the Equity and the amount of the Seller Note attributed to one of the Equity Groups. The Notes are considered contributions when considering the individual Equity Group return position, however those Notes are Liabilities for the Company and of course are not counted as Company equity.
Another reason the individual Equity Group contributions will not equal the Equity Groups interest in the Total Company will be when the Equity Groups in total, purchase or own less than 100% of the Company. In such cases, any Transaction Fees for the transaction, debt raised to fund the transaction as well as the purchase price for the Equity Groups interest in the Company happen outside of the Company. In other words, in a partial interest situation, these amounts are not capitalized on the Company's balance sheet. A purchase is between the original Equity Group or Seller and the purchasing Equity Groups. This happens so as to not dilute or change the original equity holders interest in the Company.
An exception to not allowing Partial Interest transaction debt is an Equity Debt contribution by one of the purchasing Equity Groups. This will be allowed if in the transaction, working capital cash in the same amount as the Equity Debt is being contributed to the Company. In this manner, the original Equity Groups interest is not being changed because the increase in cash will balance the new Equity Debt.
There can be three different Equity members or groups, each with a different Equity ownership %. Each Equity member or Group is treated in accordance with their ownership percentage.
An Equity member may also be the Seller and in that capacity receive separate payments from Seller Notes which will be separate from their Equity Interest.
An Equity member may also loan the Company money as an Equity Note and receive separate payments from the Equity Note which will be separate from their Equity Interest.
An Equity Member may receive a different percentage of the Gain from the Company Sale. This is intended to provide an incentive to specific equity holders (ex.-management or Investors) that pays off on the Sale of the Company. There is no tax attributes for this included in the ThruThink® analysis as it is after the Company has been sold.
In the Return to Equity calculations, for the purpose of illustrating the total benefit of the "Deal" to each Equity Member, the Equity Members share of Seller Note payments and Equity Note Payments are also included in the calculations.
When a Partial Interest purchase is being made and the User selects "Yes" in Step 8 for "Does Contributed Cash Stay in the Company", in order to keep the Equity Groups balanced, the effect of this will be that the cash is paid out to the Selling Equity Group and the Selling Equity Group and the Purchasing Equity Group re-contribute an amount of cash in proportion to their separate Equity Ownership shares. This feature will require additional cash to be contributed by the purchasing Equity Groups.
In the Equity Note section of the Cash Flow Control page, extra cash can be applied to the Equity Note. Extra payments to the Equity Note will be applied first to accrued interest on Current Input Equity Debt, then to Principal on Equity debt, then to Accrued interest on any Combined Multiple Projects Equity debt, then Principal on the Combined Multiple Projects Equity debt.
When setting up the Equity Note, the User may choose to Input a % Origination Points Fee for the Note. Because the % Points Fee becomes a Cash Requirement in the Closing Escrow, when a % Points Fee is used for the Equity Note, changing the amount of the Equity Note will cause the Cash Requirement to close the escrow to go up or down based on the amount of the % Points Fee change.
When using the Equity Note to provide the final amount of the Cash Requirement, as the Equity Note increases the Cash Requirement will also increase due to the % Points Fee, causing a never ending (although increasingly smaller) chase to provide the remaining Cash Requirement.
Either use the direct Cash Contribution to satisfy the final Cash Requirement or make several rounds of increasing the Equity Note amount to satisfy the Remaining Cash Requirement and again increasing the Equity Note amount for the resulting Remaining Cash Requirement until the Remaining Cash Requirement gets small enough to put in a direct Cash Contribution to finish the process.
The Equity Notes (inputs are a part of Step 8) may be used when the amount of cash contributed by an Equity Group is greater than that required by the Equity Group's Ownership Percentage. The cash Equity contributions by each Equity Group should be made in the same percentage as the Equity Group's percent ownership. In the ThruThink® analysis each Equity Group will be attributed its ownership of the total Company by the Equity Percent ownership of the Equity Group. In other words, if the equity contributions by the Equity members are not made in the same percentage split as the ownership percent, equity contributions from one Equity Group will end up being attributed to another Equity Group. In this circumstance, in order to keep the financial Equity split consistent with the Equity Percent Ownerships, the cash amounts contributed by the Equity Groups that are over their ownership equity percentages can be contributed as an Equity Note which will become a loan to the Company and can be at zero interest or other interest rate as desired. In that manner the Equity split of the total Company can be kept consistent with the Equity Percent Ownership of the Equity Groups.
The Equity Percent Ownership interest is an Input in Step 8. There are three available Equity Groups and a percent ownership for each. The cash Equity contributions by each Equity Group should be made in the same percentage as the Equity Group's percent ownership inputs. In the ThruThink® analysis each Equity Group will be attributed its ownership of the total Company by the actual percent of equity contributed and not necessarily by the stated Equity Percent inputs made by the User in Step 8.
In other words, the equity contributions by the Equity members should be in the same percentage as the stated ownership percent inputs. In this circumstance, in order to keep the financial Equity split consistent with the Equity Percent Ownership inputs, the cash amounts contributed by the Equity Groups that are over their ownership equity percentages can be contributed as an Equity Note (inputs are a part of Step 8) which will become a loan to the Company and can be at zero interest or other interest rate as desired. In that manner the Equity split of the total Company can be kept consistent with the Equity Percent Ownership of the Equity Groups.
In addition to the use of the Equity Notes described above, cash over the Equity Group's ownership equity percentage may be contributed as a Subordinated Debt where Warrant options and/or Payment-in-Kind (PIK) Interest can be used to share the success of the Company's future performance with the note holder, see Information Browser - Subordinated Debt
When the Existing Company is combined with or purchases the Target Company, it is necessary that the Existing Company be one of the Equity Groups. When there are other Equity Groups in addition to the Existing Company, the resulting equity split will become very complicated. The Existing Company's existing equity becomes part of the total Company equity as well as the equity contributions of the Equity Groups to purchase the Target Company. The cash equity contributions plus the Existing Company net equity will dictate each Equity Group's actual equity split of the Future Company (combined Target Company and Existing Company). Each Equity Groups equity contribution as explained above will be attributed to their equity ownership plus the Existing Company equity will be attributed to the Existing Company Equity Group. Because of this, the resulting equity splits will not necessarily be the same as the Equity Percent Ownership inputs entered in Step 8 by the User. As noted above, the use of Equity notes or Subordinated Notes (with available warrant options) by the non-Existing Company Equity Groups can be used for the non-Existing Company Equity Group's contributions. Please see the Information Browser - Balance Sheet Beginning Equity Detail for a visual representation of the resulting Equity Group equity splits.
When the Existing Company is combined with or purchases the Target Company and there are other Equity Groups involved, the resulting equity splits will be listed in the message section on the bottom of the Step 8 input page. If Equity Notes or Subordinated Debt is not used for the non-Existing Company Equity Group's cash contributions, and it is acceptable to all of the Equity Groups, the Equity Group's Ownership Percentages can be adjusted so that they come close to that shown in the note section of the page. Because the two percentage splits are relational to one another, it will involve several rounds (four or five) of adjustments to get the Equity Ownership Percentages to be approximately close to the ones in the message section of the page.
Please be sure to notice the resulting Equity Group Splits indicated in the note section of the Step 8 Equity Inputs and check the Information Browser - Balance Sheet Beginning Equity Detail for a visual representation and specific detail of the resulting Equity Group equity splits.
This measure for All Equity will include factors for the Equity of the Company as a whole.
The Modified Internal Rate of Return (MIRR) calculation will include the Cash contributed by the Equity Partners as a whole for the Cash and Equity Note contributions and the return of cash from payments from the Company for Equity Draws, Equity Note Interest and Principal repayments and if the Seller is an Equity Partner, all payments from the Company made on the Seller Note including any Performance Earn Out Note payments.
Indicated Equity after a Company Sale Gain will not include Capital Gains tax on the gain.
Equity
When the Existing Company is purchasing the Target Company, one of the Equity Group names must match the Existing Company name exactly.
An error will occur and either change the name of one of the Equity Groups in Step 8 to match the Existing Company name or change the Existing Company Name to match one of the Equity Group names.
A Gain or Loss on the Sale of the Company is calculated in ThruThink® by using the Exit Sale input as a Market Value or if no Exit Input was made in Step 7, the Hard Asset Value of the Company at the end of the Horizon Period, see Information Browser - Exit Calculations for specific detail.
By default, an Equity Member will receive the same Gain/Loss percentage as their Equity percentage. However, an Equity Member may receive a different percentage of the Gain/Loss from the Company Sale from that of the Equity Members Equity percentage by using an override input in Step 8. This is intended to provide an incentive to specific equity holders (ex.management or Investors) that pays off on the Sale of the Company. A Capital Gain tax calculation (See Step 7 - Tax Rates for Capital Gain Tax input) is used only for the ThruThink Evaluation® and the Equity Return calculations. There are no other tax attributes for this included in the ThruThink® analysis, see Information Browser - Exit Calculations for specific detail of tax calculations.
Beware that a Loss on Sale of the Company will also be passed to the Equity Member in accordance with their Gain/Loss Percentage.
If the Project is not a Quick Deal project and there is remaining equity required for the Transaction after the Equity Section is completed, there has not been enough cash provided either through the debt funds, cash equity Inputs or cash equity notes to satisfy the cash requirements of the transaction. The ThruThink® analysis will not allow this and indicate an "Error". From a numbers point of view however, the analysis will place that amount in the equity section of the Balance Sheet identified as Additional Equity Required without an Equity Group identification, but will cause an "Error" in the Error Summary Report (Current Project tab - Error Check).
To correct a Remaining Equity Required error, the User will need to either adjust the inputs in Step 6 to provide more debt funds if possible, decrease the Minimum Beginning Cash required and or increase the Equity cash provided in Step 8 or in Step 4, decrease the Purchase Price.
If the Project is an Individual Quick Deal project however, an "Error" will not be caused and an amount for the Remaining Equity Required will be automatically placed in the equity section of the Balance Sheet identified as Additional Equity Required without an Equity Group identification. If any changes are subsequently made by the User to the Equity Groups that changes it from a Quick Deal however, an error will be caused and the Remaining Equity Required will need to be identified to the individual Equity Groups.
If there is Surplus Cash which will be indicated by a negative number, any of the ways in which cash was supplied to the transaction (debt funds or equity contributions) could be reduced to reduce the amount of available cash. Also the Beginning Cash Working Capital requirement can be increased to use up the surplus cash. These measures will reduce the Surplus Cash amount. If the surplus cash is left as surplus, that amount will be distributed to the Equity Groups in their percentage of ownership indicated in the Equity Inputs, during what is considered the Transaction Escrow, in other words, after the Transaction is completed, but prior to the 1st year of operations. This will be shown in the equity section of the beginning balance sheet as a distribution.
Partial Interest Equity Purchase
The User may purchase a partial equity interest in the company in the Step 8 Equity Input process. When a partial interest of the Company is being purchased, Transaction Sheet Debt will not be allowed. The User must provide all of the funds required for the equity purchase as Equity Cash. This is because Transaction Sheet Debt will flow to the post transaction Company after the purchase and if it is used for a partial equity interest, will dilute the non purchased equity holders interest.
With a partial interest Equity purchase, the post transaction Company Balance Sheet, Income Statement, Cash Flow and Company performance reports represents 100% of the Company. There are Equity Group reports that provide return analysis on each Equity Groups performance.
If a partial equity interest is being purchased, the acquiring equity holders may provide Equity Debt but only in the same amount that Working Capital Cash is being provided by the transaction. In this manner, the non purchased equity holders interest will be kept intact because cash increased by the same amount as the Equity Debt.
When a Partial Interest purchase is being made and the User selects "Yes" in Step 8 for "Does Contributed Cash Stay in the Company", in order to keep the Equity Groups balanced, the effect of this will be that the cash is paid out to the Selling Equity Group and the Selling Equity Group and the Purchasing Equity Group re-contributes an amount of cash in proportion to their separate Equity Ownership shares. This feature will require additional cash to be contributed by the purchasing Equity Groups.
When more funds are provided thru the debt and equity contributions in the Transaction Sheet than is required for the Transaction, the amount over that required for the Transaction will be deemed Surplus Funds.
Surplus Funds can be created in the Transaction from either new debt or cash equity contributions generated for the Transaction or pre-existing debt assumed from the Seller that is being used in the Transaction.
Surplus Funds created from new debt or equity contributions will be considered distributed during the acquisition escrow to the Equity Groups in the percentage of their equity contributions or in the case of no equity contributions, their equity ownership in the Company and reflected as an Equity distribution in the Equity Section of the post closing beginning Balance Sheet.
If there are Surplus Funds, the IRR/MIRR calculations will default to "0" as there is no investment on which to calculate a return.
If the User encounters an Error for which there is no Error listed in the Error Summary, the User may send the Users data file to ThruThink® for evaluation. In the Current Project tab on the Navigation Bar, select "Send Data File to ThruThink". This will automatically send by e-mail the Users Data for the opened Project to ThruThink® Customer Support. Customer Support will evaluate what is causing the Error and provide feedback to the User. By sending the Data File to ThruThink®, the User provides ThruThink® permission to evaluate Users Data for the purposes of solving the Error. Such use by ThruThink® Customer Support is covered by the Terms and Conditions of the application.
When a project has been opened, the Project Status will be shown on the Navigation Bar. This will be either OK, Warning or Error. If the status is "OK", then there are no input or calculation errors or warnings. On the Navigation Bar, under the Current Project tab, click on the OK, Warning or Error. If the status is "Warning", the calculations are "OK", but the User should look at the Error Summary page for a list of the Warnings or Cautions. These are simply suggested issues for which the User should be aware and the User may make any changes as desired. If the status is "Error", the User should look at the Error Summary for a list of the Errors. These can be input errors by the User that cause negative balances or calculation errors or inconsistencies noted by the program. If the errors can be corrected by the User, they are noted on the Error Summary. If the status says "Error" and there are none listed in the Error Summary, then the errors are caused by calculation inconsistencies within the program and should be brought to the attention of ThruThink® by contacting ThruThink® through the means directed on the Contact page.
The User should keep in mind there are over 8,000 different inputs available for the User which create an infinite amount of possible combinations of those inputs for which testing of every combination becomes virtually impossible. Years of testing and extreme effort by ThruThink® has been made to test thousands and thousands of different combinations of inputs, however it is possible that the User could input a combination of inputs that could create a calculation error. If after correcting any User caused input errors and the status still shows "Error", then it may be useful for the User to back track through the User inputs and observe which inputs are causing the error by using the Edit/Undo feature. This will be very helpful when reporting errors to ThruThink®.
Book Value Liquidation is defined as a Company Sale at Book Value for all of the assets less the total liabilities on the Balance Sheet of the Company at the end of any given period. In this manner, assets are listed at cost less depreciation and will include all non cash assets such as Capitalized Goodwill (the amount over hard value of assets paid for the Company) and other Amortized Assets.
Book Value of an individual asset or asset category is the original cost of the asset or assets in the category less the accumulated depreciation or amortization expense for that individual asset or asset category.
Company Sale Gain is measured at the time indicated for the Exit Sale of the Company as indicated in the Exit Strategy Input page. The Sale Gain is the amount the Market Value Sale exceeds the book equity value of the Company. The Market Value can be either a multiple of the Company's EBITDA, a set given number (User Input) or a combination of both. These Market Value factors for an Exit Sale for the Company are set with Exit Strategy Inputs. They can be set for one individual year at a time or for each year of the balance of the Horizon Years. Using the EBITDA Multiple method of valuation provides an easy measure of value on an ongoing basis as it automatically reflects the performance of the company.
The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period. The ThruThink Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value for the Exit Value at year 10, if there is not a Market Value available.
There is no Capital Gain Tax applied to the Company as it is assumed that the Gain will be passed to the individual Equity Partners. Long Term Capital Gain taxes can be applied to the Equity Partner returns however in order to reflect an after tax return to the Equity Partners after the investment in and subsequent sale of the Company. The Long Term Capital Gains rate used is an input by the User in the Tax Rate Input section.
There are three types of Valuation methods used in the ThruThink® analysis; Market Value, Book Value and Hard Asset Liquidation. Please refer to the definition for each, however with the Book Value and Hard Asset Liquidation type of Sale, there is no Sale Gain.
There are two ways to establish an Exit Value for the Company; EBITDA Multiple and/or Direct Value. A Direct Value for a Company is simply a number entered by the User that represents the value of the Company or the assets being purchased. This can be used for a Company that has a large amount of hard assets that have a value not fully represented by the operating earnings of the Company. This is most common with real estate assets, note receivables, intellectual property or patents or simply a future value not yet realized. It can be used as an addition or in combination with the EBITDA Multiple Exit Value.
There are two ways to establish an Exit Value for the Company; EBITDA Multiple and/or Direct Value. The EBITDA Multiple option, is a multiple of Earnings before Interest, Taxes, Depreciation or Amortization (EBITDA) and determines Company value based on the Company earnings.
The Exit Strategy process can be found in Step 7 and is intended for the User to input a possible, expected or required Market Value sale for the Company. The Market Value may be expressed as a multiple of EBITDA or a flat amount for the Company or a combination of both. The combination is useful when the business value may include a value for the business that can be expressed as a multiple of EBITDA and other asset value such as real estate that should be expressed as a set number.
Several analysis factors in the ThruThink® analysis require an annual market value for the Company for each year in order to express a "what if" annual return for the investment in the Company. Therefore, the User should enter a factor for each year up to and including the Horizon Year of the analysis. Using the EBITDA Multiple method of valuation provides a relatively simple measure of value on an ongoing basis as it automatically reflects the performance of the company. If the analysis is set to reflect a scenario for a single year, then only that year should be completed.
The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period. The ThruThink Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value for the Exit Value at year 10, if there is not a Market Value available.
The value of a company represents all the assets of the Company that are used and necessary for the production of the income of the Company. This normally includes all of the Equipment & Machinery of the business and inventory. Accounts Receivable may or may not be included in the value. Assets that are not necessarily related to the operations of the Company are often not valued as part of the business but separately, in addition to the business value.
Input "Yes or No" on the Exit Strategy page to include or not to include those asset categories listed. If "No" is chosen, those assets will not be considered as part of the value indicated above and the balance sheet value for those assets will be added to the sale or liquidation value in order to then represent the total value of the Company.
Note: If assets such as real estate are excluded from the sale and they are in fact used by the business, the EBITDA used for the Value multiple should reflect a reasonable operating expense for the fair value of the use of the excluded assets.
Existing Company Balance Sheet Adjustments
The Adjustment Inputs on the Existing Company Balance Sheet may be used to make adjustments or reorganizations of the Balance Sheet Items. This Input can be used to add amounts to adjust the Balance Sheet to reflect a future date, such as the effective date for the Purchase of the Target Company.
The post adjustment balances will be the only ones used in the ThruThink® analysis. The adjustments are only intended to offer a paper trail as to how certain balance sheet items were adjusted to arrive at the balance used for the Effective Date.
This process can also be useful when the user is demonstrating certain changes to Balance Sheet Items prior to the Effective Date such as the effect of a debt restructure upon the close of the Transaction.
The Exit Value for the Company or Deal needs to be entered on the Exit Strategy page found in Step 7 for the most useful analysis.
The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period. The ThruThink Deal Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value for the Exit Value at year 10, if there is not a Market Value available.
The Exit Strategy process is intended for the User to input a possible, expected or required Market Value sale for the Company in a given year during the analysis horizon period. The Market Value may be expressed as a multiple of EBITDA or a flat amount for the Company or a combination of both. The combination is useful when the business value may include a value for the business that can be expressed as a multiple of EBITDA and other asset value such as real estate that should be expressed as a set number.
The Exit Value does not change the cash flow of the Company. It will flow into the Equity Analysis found on the Snap Shot Summary and the Summary of Salient Results reports.
Several analysis factors in ThruThink® require an annual market value for the Company for each year in order to express a "what if" annual return for the investment in the Company. Therefore, the User should actually enter a factor for each of the Horizon years of the analysis, however the last year of the time horizon and Year 10 if the horizon is greater than year 10 are the most important inputs. Using the EBITDA Multiple method of valuation, provides a relatively simple measure of value on an ongoing basis as it automatically reflects the performance of the company. If the analysis is set to reflect a scenario for a single year however, then value factors for only that year may be entered.
Hard Asset Liquidation - Return
Hard Asset Liquidation is defined as the Net Book Value from the Balance Sheet of the Company (Assets less Liabilities) less non cash assets such as Capitalized Goodwill (the amount paid for the Company over the value of actual assets included with the Company) and Capitalized Acquisition Costs and other Amortized Assets. This will be referred to as Hard Asset Liquidation or HA.
The Hard Asset Value is a value only for its tangible assets (Hard Assets) and assumes this is a worst case valuation of the Company. It gives no value for the market value of the Company over its hard asset value. This focuses this particular evaluation only on the operating performance of the Company. Sometimes the worst case value may be even less than the Net Book Value of the Hard Assets, therefore the User must be aware of the relationship between Net Book Value without Goodwill and the actual realizable Market Value of the Company when using this measure of value.
Hard Asset/No Debt
For Investment comparison purposes, the Hard Asset Liquidation is used as the Exit Value, however, in order to remove the influence of leverage on the returns, it ignores the financing type of debt in the purchase, operation and liquidation of the Company. Therefore, the Hard Asset Liquidation value of the Company in this instance will be the net book value of the assets less the Goodwill. This will be referred to as Hard Asset/No Debt or HA/ND.
Hard Asset/No Debt Liquidation Value (HA/ND)
With the Investment Comparison process for the HA/ND IRR calculation, the HA/ND Liquidation value is used as an Exit Value, which does not incorporate any of the Company's debt, and EBITDA is used as the annual cash return. In this instance, because of using EBITDA, even though HA/ND assumes no debt, any Accounts Payable listed as debt on the balance sheet are subtracted from the HA/ND value. This is because when using EBITDA as the cash return, EBITDA is calculated after subtracting all expenses except Interest, Income Taxes, Depreciation and Amortization expenses. Accounts Payable will reflect expenses that are already subtracted to arrive at EBITDA and therefore for this purpose, A/P should be assumed paid (since EBITDA is used as the cash return), thereby reducing Exit Value assets.
Market Value Liquidation - Return
In the Exit Strategy Input page, there are two ways to input the Market Value of a company sale, EBITDA Multiple or Direct Value:
EBITDA Multiple used as indication of Economic Value
After the Company's EBITDA is determined, the economic value of the operations of the Company is often expressed as a multiple of the Company's EBITDA. Generally this ranges from a low multiple of 2-3 to a high multiple of over 10 (for private companies). The actual multiple used is determined by how stable the present EBITDA is going forward given a certain risk level. If there is a good case that the EBITDA will increase substantially going forward at an acceptable risk level, then a higher multiple is justified. If on the other hand, the EBITDA growth is declining, a lower multiple is justified or the risk of EBITDA volatility is relatively high, the multiple should be lower.
EBITDA Multiple used as the Exit Strategy Value
EBITDA Multiples for a Market Value Sale of the Company can be set with the Exit Strategy Input page. The Exit Strategy page will allow the User to exclude from the EBITDA Multiple Value Sale certain asset categories on the Balance Sheet such as A/R, Inventory, Notes Receivable, Equipment or Real Estate.
An EBITDA Multiple can be set for one individual year at a time or for each year the balance of the Horizon Years. Using the EBITDA Multiple method of valuation provides an easy measure of value on an ongoing basis as it automatically reflects the performance of the company.
Direct Value Input for Exit Strategy Value
A Direct Value for a Company is simply a number entered by the User that represents the value of the Company or the assets being purchased. This can be used for a Company that has a large amount of hard assets that have a value not fully represented by the operating earnings of the Company. This is most common with real estate assets, note receivables, intellectual property or patents or simply a future value not yet realized.
A Direct Value can be used together with the EBITDA Multiple Method or separately as a total value for the company.
The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period. The ThruThink Deal Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value for the Exit Value at year 10, if there is not a Market Value available.
The Cash balance of the Company as well as its Debt are not usually included in a Market Valuation, therefore for a net benefit from a Market Value Exit Sale, Cash is added to the Market Value and the Debt is subtracted along with any excluded assets described above.
At times it may become necessary to remove a certain amount of Accounts Receivables and Inventories that have become uncollectable as in A/R or unusable as in Inventory.
In some businesses, there may be the need to have a standard allowance for this on an annual basis or on a multi-year basis (such as every other year). This is a non essential voluntary input option.
The write off amount will reduce the A/R or Inventory and increase expense at the end of the year of the write off.
Amortization is spreading out the cost of a non tangible asset over a period of years (Life Period) instead of expensing it all in one year. In the ThruThink® analysis there are two available categories for amortized assets. The first will pertain to Capitalized Transaction Expenses and Goodwill which will both use the same Life Period. The second one is a for Amortized Assets that are identified on the Capital Expenditures Input page. Separate Life Periods in years may be used for each of the two categories. Both will be capitalized to the Amortized Asset category on the Balance Sheet. Each year of the Life Period, an Amortization Expense will calculated using the same Life Period for both Accrual expenses and Cash Basis expenses. The Users should consult with their Tax Advisors for proper Life Period to use.
Unless changed by the User, a default Life Period of 15 Years will be used for both Asset Categories.
Amortization Terms only apply to the Transaction Sheet Assets and new Capital Expenditures. The Existing Company Asset Amortization expense is entered by the User in whole numbers and are not calculated.
For the existing Company Amortized Asset Category, the future amortization expense is a manual input number entered by the User as a future Existing Company Amortization Expense Input and not calculated from the beginning asset value itself.
Amortization expense entered for future years for the Amortized Asset category must be less than or equal to the asset category net value entered on the initial Existing Company Balance Sheet. Amortization expense input whose sum exceeds the asset category value will cause an error and not be allowed.
Direct expenses in one period for items sold in another period can be removed from expense in the initial period the expense was created and put back in expenses in the period the item is actually sold. By removing the item from expense, the expenses are put into Inventory and considered an asset until removed from inventory and "expensed" or put back into expenses in the form of Cost of Goods Sold (COGS) to match the product or items being sold in a subsequent period.
The removal of the expense and placing it into inventory is called "Capitalized Expenses".
Expenses that are capitalized are usually the direct expenses of the item sold such as labor, material and other expenses that are directly tied to and fluctuate with the amount or number of items purchased or manufactured. Sales expense, time of sale packaging, freight to the customer and overhead items that do not directly fluctuate with the amount or number of items purchased or manufactured are generally not capitalized and are left in expenses.
The purpose of this process is to match income against the proper expense associated with that income in the period that the income occurs.
Cost of Goods Sold or Cost of Sales (COGS) are the direct expenses of the product sold such as direct labor, materials, energy, packaging, shipping expenses and generally vary in direct proportion to the quantity sold.
Because of this, COGS is often expressed as a % of Sales.
General Administration, Interest and Overhead costs are not generally included as COGS, but as an overhead type of category.
Cost of Goods Sold (COGS) items can be entered by the User in four different ways:
1. A Percent of Sales in Step 3
2. A Cash Flow Control page override adjustment as a Percent of Sales input. The % of Sales for COGS entered in the Cash Flow Control page will override the Step 3 % inputs.
3. A Cash Flow Control page override adjustment as a Whole Number input. A Whole Number input for COGS on the Cash Flow Control form will override both the Step 3 and Cash Flow Control % COGS inputs.
4. Individually Identified Items. For the Years 1-3, the detail for specific Individually Scheduled COGS can be entered in the Individually Scheduled COGS Input page for each of Years 1-3. The balance of the Horizon Years will use the same input as Year 3 unless overridden with an individual input for the total of the Individual Identified Items in any of the applicable Horizon Years . This is intended to use Years 1-3 to set a pattern. Individually Identified COGS will be separate and in addition to any % of Sales or Whole Number COGS inputs.
Generally when a product is manufactured or purchased for resale, the cost of the item will be put into inventory as an asset. When the item is then sold, or combined with other items and sold, the cost of the item(s) will be taken out of inventory and expensed as a part of Cost of Goods Sold (COGS).
The total COGS for the item sold however will also contain other costs that are incurred at the time of sale such as packaging, shipping etc. The percent of COGS to be inventoried therefore is the percent of the total COGS that are expenses purchased for inventory to be used at a later date.
Depreciation is spreading out the cost of a tangible asset over a period of years (Life Period) instead of expensing the total purchase in one year. In the ThruThink® analysis there are available categories for Machinery & Equipment, Buildings & Improvements and Other Long Term Assets each with separate Life Period Inputs for both Accrual and Cash Basis. Each category will be capitalized to the same category on the Balance Sheet. Each year of the Life Period, a separate Depreciation Expense will calculated for Accrual expenses and Cash Basis expenses. The Users should consult with their Tax Advisors for proper Life Period to use.
Unless changed by the User, for both Accrual and Cash Basis, a default Life Period for Equipment & Machinery will be 10 years, Buildings & Improvements, 20 years and Other Long Term Assets will be 10 years.
Depreciation Terms only apply to the Transaction Sheet Assets and new Capital Expenditures. The Existing Company Asset Depreciation expense is inputted by the User in whole numbers and are not calculated.
Depreciation Adjustment - Asset Sale
For the years following the Asset Sale, the regular depreciation expense will continue but be reduced by an allocated amount representing the Sold Asset. The Sale Amount will be divided by an estimate for the remaining life for assets in that Asset Class which will reduce the annual depreciation expense amount for the Asset Class (ex: all assets booked as Machinery & Equipment). This adjustment is only an estimate and not based on specific asset removal as the exact year of original acquisition of the Sold Asset is unknown. An Adjusting Journal Entry may be made to Accumulated Depreciation, Depreciation Expense and Gain/Loss on Sale to make more specific adjustments.
For the existing Company assets, the future depreciation expenses are manual input numbers entered by the User as future Existing Company Depreciation Expense Inputs and not calculated from the asset values themselves.
Depreciation expenses entered for future years for each asset category must be less than or equal to the asset category net value entered on the initial Existing Company Balance Sheet. Depreciation expense inputs for a given asset category whose sum exceeds the asset category value will cause an error and not be allowed.
This page will guide the User in entering growth projections derived from the Base Sales for Income and Expenses or growth projections for EBITDA (Earnings before Interest, Income Taxes, Depreciation and Amortization) derived from base EBITDA.
Using the EBITDA option will override any inputs made for Income/Expense as EBITDA is the net result of the income less expense.
Options for entering Income & Expense:
1). The User may make projections for Years 1-3 in the Historical Worksheet process. If after making these projections, the User will have the option to input the projections into the Cash Flow Control page, (if you do not know whether you did this, it is a very deliberate process that you probably will remember doing). If the User chose to input the projections from the Historical Worksheet into the Cash Flow Control, then the Step 3 input should be skipped.
2). The User may make % growth inputs over Base Sales on the Step 3 input page along with % of Sales inputs for expenses for each of the years 1-3 and one constant growth input that will be used for all remaining years of the Horizon period.
3). The User may make % growth inputs over Base EBITDA on the Step 3 input page for each of the years 1-3 and one constant growth input for EBITDA that will be used for all remaining years of the Horizon period.
4). There are override inputs available for each of these Step 3 inputs on the Cash Flow Control page and the User may choose to skip the inputs here and make projections for Income/Expense or EBITDA directly on the Cash Flow Control page. If inputs are made here, the User will continue to have the opportunity to make adjustments on the Cash Flow Control page which will then override inputs made on this page.
5). Detailed individual inputs for Income and Expense can be made by using the Individually Scheduled Item options on the Step 3 input page which will provide individualized input options that are not available on the Step 3 input page or on the Cash Flow Control page.
The Individually Scheduled Item results and all of the Income and Expense or EBITDA growth inputs on the Step 3 input page will show up separately and be included on the Cash Flow Control page. If these are subsequently overridden by inputs directly to the Cash Flow Control page, these inputs will no longer be visible from the Cash Flow Control page.
There are four ways of entering future Expenses:
A Percent of Sales for Cost of Goods Sold (COGS) and General Expenses for each of years 1-3 and a percent for all years after Year 3 can be entered on the Step 3 Sales and EBITDA Input page. This is a quick and less time consuming method of entering future Sales and Expenses and is done while entering Base Sales and or Base EBITDA Inputs in Step 3.
A % of Sales for COGS and General Expenses for each of the Horizon Years can also be entered on the Cash Flow Control page in Step 3. These entries will override any conflicting entries made on the Sales and EBITDA page and can be used to adjust the Sales and Expense projections. This is done while reviewing the Cash Flow results on the Cash Flow Control page and is a good method to adjust Sales and Expenses while being able to see the resulting financial impact.
For more detailed Sales and Expense inputs the Individual Scheduled Item pages may be used to input individual Sales and Expense projections in detail. This method is useful when specific detailed expense projections are necessary by month during the year. Units and $/Unit inputs may be made on this page for Inventory use, expensed Cost of Goods Sold type of expenses and capitalized Cost of Goods Sold type expenses.
Individual Overhead and General Expenses that are not considered Cost of Goods Sold type of expenses can be entered with the Operating Expense Adjustment page.
Part 1 - The Individually Scheduled Section C Expense Input form
This form will create Individually Scheduled Expense Items and will indicate when it is to be expensed during the year. This should be Cost of Goods Sold type of expenses incurred in the current year.
For every entry made in this form, a Pop Up will appear that will allow the User to capitalize a portion of or all of the expense entered to the following year. The capitalized expense will become inventory the current year until the period indicated to be expenses in the next year. The Pop Up page will give the User the opportunity to designate a Month and Sale Value in the next year that the Capitalized Inventory will be used and the value for which it will be sold. Each time an entry is made on this form, the User will be prompted with a new Pop Up page to capitalize all, none or a portion of the item and next years' Month and Sale Value of the item. If there is an existing capitalized amount for this item, it will be shown on the prompt and the User may change or accept that amount. If there will be no capitalized amount, a '0' must be entered for the capitalized amount. Each individual capitalized input will flow to the Individually Scheduled Section C Capitalized Expense page
The un-capitalized portion of these expenses will be entered as expenses under Cost of Goods Sold.
Part 2 - The Individually Scheduled Section C Capitalized Expense Input form
The capitalized portions of these expenses can be seen the Individually Scheduled Section C Capitalized Expense page where edits of the inputs may be made by the User.
This provision is intended for the User who is a Buyer of the Company to Write Off a percentage of the initial Asset value that is being paid to the Seller of the Company to reflect general confidence issues with the asset at the time of purchase or analysis.
If a certain value must be paid to the Seller, however the User (Buyer) doubts the value used for the asset, the User can write off a portion of the beginning value but not change the Purchase Price paid to the Seller. The value after the Write Off will flow into the post closing Balance Sheet.
The Input is a Percentage of the value being paid to the Seller of the particular Initial Asset Value.
The Initial Write Off will reduce the initial value of the asset by the % of the Write Off. The write off will apply to the applicable balances of the indicated asset for either the Transaction Sheet or the Existing Company financial input sheet. The Write Off will be applied in the pre-closing transaction and adjust the beginning balance of the first period. It should be considered as an adjustment to the beginning basis value of the assets involved. It will not have an effect on net income or loss.
The effect of the Write Off will be to increase the Goodwill paid for the Company.
This input is available on the Transaction Sheet Asset Input page for the major asset categories and is found in Step 5.
In the ThruThink® analysis, Overhead Operating Expenses can be entered using three methods. They may be entered as a percentage of Sales in the Step 3 Inputs or with an Override input on the Cash Flow Control page. Overhead Expenses may also be entered by individual item amounts with the Overhead Expense Adjustment Input page.
These are expenses such as general operating expenses, non specific marketing and sales expenses and general and administrative overhead that do not necessarily vary directly with the amount of product sold.
These type of expenses may however increase as product is sold on a stair step like manner. In other words, the expenses will stay level with a certain range of sales and then increase to a new level. It will be more difficult to express this type of expense with a percentage of Sales if sales change significantly from year to year. If this is an issue, the Cash Flow Control will allow the User to Input summary whole numbers for each individual year.
The value for any assets retained by the Seller at the close of escrow such as real property, buildings, and or fixed in place equipment that are to be used by the Company need to be included in the projected expenses of the Company. An annual lease percentage can be used to represent this expense and is found as an input in Step 7.
This value is a separate input from the Value of Seller Assets retained in the Purchase Price input in Step 4. It may however be the same value as that used in Step 4 or may be a different value. The distinction is the value used in this input is the value upon which the User wishes to base a rent or lease payment.
In Step 7, there is an annual Seller Lease expense input. Because this calculation is independent of the Seller Retained Assets in Step 4, the lease represented in Step 7 may also represent any other assets owned by the Seller or other party as required by the User. The reason to use Step 7 is to make it a priority expense which will not be affected by an EBITDA override.
This is a very simple annual percent lease or fixed payment calculation and is intended to provide the User the ability to input an expense for assets that are required for normal operations of the Company that would otherwise be acquired with the purchase of the Company, but are not included in the purchase price. This should not be used for post close of escrow (Effective Date) asset leases. An example of the intended use would be for a building or Real Estate that the Company used and Real Estate is often not part of a Company purchase.
The percentage used should represent an appropriate annual charge for the use of the assets represented.
The Tax Rate Schedule is for the convenience of the User. Any default entries are very general in nature. This schedule and the User Inputs should only represent generalized tax rates to provide an estimated expense for income taxes. These rates should be updated by the User for any specific year, country, state or region.
Income Tax Expense in the Income Statement and the Liability for the Income Taxes Due in the Balance Sheet are calculated on the Accrual Basis. The User may choose to pay taxes on a Cash Basis and the cash tax payments will be calculated and paid accordingly. The Cash Flow Control will reflect the Taxes paid.
There are two types of Income Tax intended as a Federal or Country Income Tax and a State or Region Income Tax.
The income tax calculations in this analysis are not intended to reflect actual tax computations based on any tax code. They are intended to give only a very general indication or estimate of tax expense using the rates indicated on the Tax Rate page as applied to basic unadjusted net gains from a sale or net income from operations as defined in this analysis. A tax specialist should be consulted using the appropriate tax code for a more specific estimate of the tax expense or liability on any individual situation.
For each type of tax, the Tax Rate Input page allows for up to seven graduated taxable income levels. For simplicity, the default is just one tax level for all taxable net income. The User may adjust accordingly.
The ThruThink® analysis will apply the rates shown in the Tax Rate Input page to the Taxable Net Income calculated by the analysis for the future years. The Taxable Net Income is a basic generalized assessment of Taxable Net Income using EBITDA less Interest paid less the Tax basis depreciation and amortization expense as set up in the ThruThink® analysis by the User.
The actual tax calculated for any given year (Taxable Year) will be expensed in the Taxable Year.
For Cash Flow purposes, there are estimated tax payments paid during the Taxable Year on a quarterly basis in Period 4, 6, 9 and 12 of the Taxable Year. Actual taxes are then calculated for the Taxable Year and paid in Period 4 of the following year with a credit taken for the estimated payments paid during the Taxable Year.
At the end of the Taxable Year there will be an Income Tax Liability for the difference between the Taxes Owed and the estimated tax payments made during the Taxable Year.
With ThruThink®, there is a provision to apply Net Operating Losses (NOL) from previous years to the Taxable Income of the Taxable Year. Please see separate Help Topic for Net Operating Loss carry forward.
On the Historical Worksheet, the User may designate each expense item as an Accounts Payable (A/P) type item by entering YES or No by the item in the A/P column. An A/P type item is an item that for cash flow purposes can be paid in accordance with the A/P terms of 30, 60, etc days to pay. The purpose of this is to give the User an idea of the % of A/P type items in the total expenses. This % can be used in setting up the Accounts Payable - Future Terms Set-Up in the ThruThink application (See Information Browser). An example of an item that would not be treated as an A/P type item is Labor.
Enter Yes for items that can be paid over seven days later.
On the Historical Worksheet, the User may adjust the Historical Expenses by removing items that need to be adjusted to more accurately represent EBITDA of the Company as a stand alone on-going business in the future.
Enter positive # to add income or remove expenses deducted above or negative # to remove income or deduct additional expense.
Because EBITDA is Earnings before Interest, Income Taxes, Depreciation and Amortization, if these type of expenses are included in the Historical Expenses entered for the Company, all Interest, Income Taxes, Depreciation or Amortization amounts contained in the Historical Expense should be removed by entering a positive number representing those items in the Add back section.
Gain or Loss on Sale of Assets should be removed for EBITDA purposes. Depreciation expense influences the Gain/Loss calculation and since Depreciation is removed for EBITDA purposes, the Gain/Loss on Sale of Assets should also be removed. If Asset Sales are considered part of the trade or business then their activity should be included as regular Sales and Cost of Goods Sold and not be depreciated. Talk with an accountant for further clarification.
Other items to include in the Add back section are often things like previous owner compensation or expenses that will not need to be replaced by future employees be entering a positive number or additional labor required to replace the previous owners or other unpaid or underpaid contributions by entering a negative number.
This may also be adjustments to remove extraordinary expenses or income that occurred in the past that is deemed to not represent normal operations. This could be extra legal or accounting expenses to prepare for a sale or to take care of an unusual circumstance of some kind.
In other words, this process tries to normalize historical EBITDA results to provide a base to compare future projections.
On the Historical Worksheet, the User may identify each item with a separate identifying category such as a company or item type. This could be used to identify the items as to the Target Company or the Existing Company or two companies that will be combined in the projections or two types of items. Enter a "1" "2" for a separate identifier. This is an optional input whose only purpose is to breakout the categories separately in the totals on the Historical Worksheet. If nothing is entered for the Category number, then the Totals will simply not be split out by individual Category.
On the Historical Worksheet, the User may skip entering Income and Expenses separately. Enter the EBITDA amount in the 'Add back' section of the page as an add back adjustment.
The ThruThink Evaluation® however uses historical sales in its analysis and entering EBITDA without Sales will cause the evaluation to be less accurate. Because of this, historic sales may be entered in the Sales Section of the page and that same Sales total reversed out by entering a negative amount for the Sales total in the EBITDA 'Add back' section of the page. In this manner, the EBITDA will reflect only the EBITDA only input.
On the Historical Worksheet, for Cost of Goods Sold and Operating Expense, there are six places in each type of expense to insert a % in order to calculate the expense amounts as a % of sales. These are intended to input a % for each of Years 1-3, however it can be used as the User desires. The balance of the inputs available in each expense section are for input of direct amounts instead of a %.
On the Historical Worksheet, the User may use the projections on the Historical Worksheet for the Cash Flow Control page by selecting the button, 'Input to Cash Flow Control', at the lower right portion of the Historical Worksheet. This will update the Cash Flow Control page with the sales and expense projections from the Historical Worksheet. If the button is not used, the User will need to proceed to either the Cash Flow Control page or Step 3, the Sales/EBITDA Input page to make alternate inputs.
When the Input to Cash Flow Control button is used, the updates to the Cash Flow Control page are referred to as Worksheet Adjustments and are made in order that the Cash Flow Control page will match the Worksheet projections.
If the Input to Cash Flow Control button has been used, the Worksheet Adjustments may also be removed by selecting the Remove Option found in the Input to Cash Flow Control button.
After updating the Cash Flow Control page with the Worksheet Adjustments, if inputs from another source occur, the User should remove the old Worksheet Adjustments and repeat the process to re-enter updated Worksheet Adjustments.
On the Historical Worksheet, the Most Current Earnings section is meant for the current year or the most recent partial year. For the Year Input, enter the period represented such as YTD 7/31/xx partial year. Enter the number of months that the 'Most Current Year Earnings' column represents. If the amounts represents a full year, input 12. For a partial year, input the # of months the partial year represents. The worksheet will convert the partial year to a 12 month basis by dividing the amount by the partial months and multiplying by 12.
This is an optional input on the Historical Worksheet and is for Users information only. The source of information can be such things as audited financial statements, reviewed financial statements, compiled financial statements, internal financial statements, tax returns, estimates or internal.
For Historical EBITDA Input
On the Historical Worksheet, the Un-Compensated Owner Compensation comes from the inputs on the Un-Compensated Owner Contribution Input page. This is a non cash implied expense on the Historical Worksheet in order to make the EBITDA comparison and Company Value indication more accurate.
This is the value of the Un-Compensated Owner Time and Talent Contributions over the time period of the Historical analysis.
Un-Compensated Owner Contribution is defined as that time and talent contribution that is not being paid to the Owner which is critical to the operation of the Company without such, the Company's existing EBITDA as represented in Historical Worksheet could not have been achieved. The value of such Un-Compensated Owner value should be that which would be required to replace such contribution from an outside party.
This should be only that Un-Compensated Owner contribution to operations that would need to be replaced if the Owner were not there. This reflects that the level of EBITDA as represented in the Historical Worksheet which does not contain sufficient expense to properly compensate for the operational time and talent contributions of the Owner. This input will be used as a factor in the Evaluation and Deal Score but it will not change the current EBITDA or add expense to the projected EBITDA.
If the owner of the Company is making significant Un-Compensated time and talent contributions to the operation of the Company the value of this contribution should be considered in order to properly asses the real value of the actual Company or Deal. Often the value of this contribution is excluded as "Owner Benefits", however without this adjustment. very often the EBITDA value of the Company or Deal simply reflects providing the Owner a "job".
Un-Compensated Owner Contribution Inputs
ThruThink Evaluation® Input
This input is entered through the ThruThink Evaluation® Additional Information page or in the Quick Deal Input page and only reflects the Un-Compensated Owner Contributions that are not reflected in the current level of EBITDA as entered in Step 3. This is intended to reflect the current situation as represented with the current level of EBITDA as entered in Step 3.
The amount entered for Un-Compensated Owner Contributions for the ThruThink Evaluation® will not add expense or effect the cash flow projections but be used as a factor in the evaluation. A significant amount of Un-Compensated Owner contribution to the strategic operation of the Company will have a negative impact on the Evaluation and Deal Score. This input should be as realistic assessment as possible as it is an important component for proper Deal evaluation.
This input should not considered as the return on the Owners equity which should be reflected in Step 8.
In addition to the above, for proper evaluation of the Company's past performance and future performance as compared with the current level of EBITDA as entered in Step 3, the Historical EBITDA and projected EBITDA should also reflect any applicable Un-Compensated Owner Contribution.
Historical EBITDA Input
This input is entered on the Un-Compensated Owner Contribution Input page and applies if the Historical Analysis does not reflect the value of the Owner's contribution to the Operations of the Company, an amount can be automatically added as an implied expense to the Historical Analysis in order to make the EBITDA comparison and Company Value indication more accurate.
Projected EBITDA Input
This input is entered on either the ThruThink Evaluation® Additional Information page or with the Un-Compensated Owner Contribution Input page and applies only if the Projected EBITDA does not reflect the value of the Owner's contribution to the Operations of the Company. This is for the purposes of the ThruThink Evaluation® calculations only and will only add an implied expense to the projected EBITDA for the evaluation calculations and will not add expense or a cash flow adjustment to the actual projected EBITDA. Actual expense or cash flow adjustments for Owner Compensation can be made using the Step 7 Inputs or the Owner Compensation Input page directly.
All Capital Gains in the ThruThink® analysis are considered Long Term Capital Gains representing the sale of assets held longer than one year.
The Capital Gains rate is used for calculating the tax on the Gain on Sale of Assets by the Company and for items that apply to the individual Equity Owners such as their receipt of Performance Note principal payments and the individual Equity Owners after tax Equity Returns from an Exit Sale of the Company. Net Income from these items are all assumed to be Capital Gain.
The sale of assets are recorded by entering a negative number on the Step 7 Capital Expenditures (CapEx) page. See Help - Capital Expenditures. A negative number input is used to represent Asset Sales and should represent the proceeds from the Asset sale. In the ThruThink® analysis, the negative number entered as an Asset Sale will reduce the Gross Value of the Asset Class and increase Cash. To fully represent the Asset Sale, multiple accounting style Adjusting Journal Entries (AJE) in Step 7 will need to be made to record the Gain (Loss) on Sale of Assets, the reduction of Accumulated Depreciation and adjust the Asset Value to reflect the removal of the Book Value of the asset instead of the proceeds from the sale. Capital Losses from the Sale of Assets will be carried into future years to apply against future Capital Gains. No Capital Loss will be applied against Ordinary Income.
When the Asset Class is reduced to zero, excess proceeds up to the amount of the accumulated depreciation for that Asset Class will be considered as depreciation recapture and be taxed as Ordinary Income. After the Asset Class is reduced to zero, excess proceeds that exceed the Accumulated Depreciation for the Asset Class prior to the sale, will be considered as Long Term Capital Gain.
This page will guide the User in entering growth projections derived from the Base Sales for Income and Expenses or growth projections for EBITDA (Earnings before Interest, Income Taxes, Depreciation and Amortization) derived from base EBITDA.
Using the EBITDA option will override any inputs made for Income/Expense as EBITDA is the net result of the income less expense.
Options for entering Income & Expense:
1). The User may make projections for Years 1-3 in the Historical Worksheet process. If after making these projections, the User will have the option to input the projections into the Cash Flow Control page, (if you do not know whether you did this, it is a very deliberate process that you probably will remember doing). If the User chose to input the projections from the Historical Worksheet into the Cash Flow Control, then the Step 3 input should be skipped.
2). The User may make % growth inputs over Base Sales on the Step 3 input page along with % of Sales inputs for expenses for each of the years 1-3 and one constant growth input that will be used for all remaining years of the Horizon period.
3). The User may make % growth inputs over Base EBITDA on the Step 3 input page for each of the years 1-3 and one constant growth input for EBITDA that will be used for all remaining years of the Horizon period.
4). There are override inputs available for each of these Step 3 inputs on the Cash Flow Control page and the User may choose to skip the inputs here and make projections for Income/Expense or EBITDA directly on the Cash Flow Control page. If inputs are made here, the User will continue to have the opportunity to make adjustments on the Cash Flow Control page which will then override inputs made on this page.
5). Detailed individual inputs for Income and Expense can be made by using the Individually Scheduled Item options on the Step 3 input page which will provide individualized input options that are not available on the Step 3 input page or on the Cash Flow Control page.
The Individually Scheduled Item results and all of the Income and Expense or EBITDA growth inputs on the Step 3 input page will show up separately and be included on the Cash Flow Control page. If these are subsequently overridden by inputs directly to the Cash Flow Control page, these inputs will no longer be visible from the Cash Flow Control page.
Part 1 - Section D Income from Inventory Use page
This form will record the sales of Individually Scheduled Inventory that is used in Section B and will indicate when it is to be sold during the year.
The Sale Value will become Gross Income being generated from the inventory that was indicated 'used' in the Individually Scheduled Section B Inventory Use page in the same month the inventory was used.
If this is Work in Process type of inventory, i.e., individual parts of a final product, then either Exit the page or a '0' may be used for the Sale Value. The Sale Value of the finished product may then be entered individually in Section D - Scheduled Income.
Part 2 - Section D Income page
This page will record Individually Scheduled Income items and will indicate when it is to be received during the year.
This income from Inventory Sale and the Individual Income Items will be added to the Individually Scheduled Income and the total can be seen on the Cash Flow Control page marked as Individually Scheduled Income.
Interest income comes from either the interest bearing portion of the Other Current Asset or the Individually Scheduled Security/Notes Receivable.
Beginning Interest Receivable can be entered as a beginning Existing Company Asset. It will be automatically received at the end of Year 1 as a cash inflow item. This will be reflected as Cash Basis Income, but not Accrual Income. The User may make an AJE (see AJE Process) to extend this item if it is not to be collected in year 1, however in that case it should not be listed as a Current Asset (assets to be collected within 1 year) but rather as an Other LT Asset.
Interest income for a given year (Accrual Interest Income) is the Interest Rate as indicated in the initial item set up (Other Current Asset or Individual Scheduled Note) multiplied by the principal balance of the item at the beginning of the year and is shown as accrued interest income for that year.
Interest received in a given year can be adjusted by an AJE. The other side of the AJE entry may be either cash or Interest Receivable Asset. When Interest Receivable is reduced with an AJE and the debit is cash, it becomes cash received and that amount is included with the Regular Interest received.
Cash Flow Control adjustments may be made to either Other Current Asset or Individually Scheduled Notes and will be first applied to any outstanding interest and then to principal.
Inputs for Base Sales and EBITDA are found in Step 3 and are amounts for the Company being Purchased or Analyzed on an annual basis that represent the annualized level for Sales and EBITDA as of the date of the transaction or Effective Date.
The Base amounts can be the historical annual amounts or if sales and/or EBITDA are increasing on a month to month basis, the Base amounts can be the recent monthly amounts expressed on an annual basis (annualized) if the User feels that recent activity can be sustained on an annual basis in the future.
The Base Sales and/or EBITDA are the amounts on which future percent increase adjustments will be based.
EBITDA - Base EBITDA
Inputs for Base Sales and EBITDA are found in Step 3 and are amounts for the Company being Purchased or Analyzed on an annual basis that represent the annualized level for Sales and EBITDA as of the date of the transaction or Effective Date.
The Base amounts can be the historical annual amounts or if sales and/or EBITDA are increasing on a month to month basis, the Base amounts can be the recent monthly amounts expressed on an annual basis (annualized) if the User feels that recent activity can be sustained on an annual basis in the future.
The Base Sales and/or EBITDA are the amounts on which future percent increase adjustments will be based.
The current level of Sales for the Company is entered in Step 3. It is important to complete the Base Sales in Step 3 as that information will also be used as part of the Deal Evaluation process.
There are three ways of entering future Sales:
A % change for Sales for each of years 1-3 and a percent for all years after Year 3 can be entered on the Step 3 Sales and EBITDA Input page. This is a quick and less time consuming method of entering future Sales and is done while entering Base Sales and or Base EBITDA Inputs in Step 3.
A % change for Sales for each year for each of the Horizon Years can also be entered on the Cash Flow Control page. These entries will override any conflicting entries made on the Sales and EBITDA page in Step 3 and can be used to adjust the Sales projections. This is done while reviewing the Cash Flow results on the Cash Flow Control page and is a good method to adjust Expenses while being able to see the resulting financial impact.
For more detailed Sales inputs the Individual Scheduled Item pages may be used to input individual income projections in detail. This method is useful when specific detailed income projections are necessary. Inputs may be made in the form of Units and $/Unit for these inputs.
The Income Statement is a statement of Profit and Loss indicating Net Income and is calculated on an Accrual Basis. This means that Income and Expenses are recognized in the period that they are incurred, regardless of when they are paid. Inventory, Accounts Receivable, Cost of Goods Sold, Accounts Payable and Accrued Income and Expenses are examples of items used to reflect the period the item is incurred vs. the period they are paid or received. Cash Flow however, reflects actual cash receipts and cash outflow. There is a Sources and Uses of Cash Statement that shows the relationship between Net Income and Cash Flow.
Interest expense for a given year is the Interest Rate as indicated in the initial debt setup multiplied by the principal balance of the loan at the beginning of the year and is shown as an accrued interest expense for that year.
Interest paid in a given year is calculated using the Interest Rate as indicated in the initial debt setup multiplied by the principal balance of the loan, as adjusted by additional AJE or Cash Flow Control adjustments to the principal, at the end of the previous year.
Accrued Interest Expense will be adjusted accordingly by any AJE's made directly to Accrued Interest Expense or by any AJE's or Cash Flow Control page adjustments made to the principal amount of the loan in the prior period.
Accrued Interest Liability
The beginning Balance for Accrued Interest Liability is entered with the Existing Company beginning debt in Step 6.
An Accrued Interest Liability can be generated automatically for some of the Debt accounts when interest is not automatically paid each year. Other Current Debt and Seller Debt are two such debts. General adjustments to Accrued Interest Liability may be made with an AJE (Debit/Credit) to the individual Debts that have separate Accrued Interest Liability accounts or to a general Other Accrued Interest Liability.
Direct payments to Accrued Interest Liability is made with an AJE (debit), (see Step 7 - Adjusting Journal Entries). When Accrued Interest is paid with an AJE, it becomes a cash payment and that amount is included with the Regular Interest paid. Accrued Interest liability for a particular debt whether or not created with an AJE, will be paid down by additional payments for that debt in the Cash Flow Control page.
In the ThruThink® analysis, Payment in Kind (PIK) is an extra annual interest fee charged by a Subordinate Debt lender that is paid at the end of a pre determined period (Payment Beginning Year). It is considered as additional interest, accrued, but unpaid until the Payment Beginning Year. It is in addition to the regular stated interest rate for the loan and, as interest, is the percent indicated (PIK Interest Rate) applied to each years beginning balance of the loan for each year it is in effect (from the initial period of the loan until the Payment Beginning Year).
The PIK payment can be paid in a lump sum or in annual installments (# of Payments) that begin in the Payment Beg Year and continue annually for the # of years indicated for the # of Payments.
The PIK Interest will be an accrued interest expense while accruing, creating an accrued liability and when paid, a reduction of cash, a reduction of the liability and for cash basis taxes will be a cash basis expense in the date it is paid. For accrual basis tax, it is an accrued expense in the year accrued.
Rate Adjustment is the option to increase the Interest Rate at a certain Point in the future. This is used with the Seller Note as the Seller Note can be Interest Only or Amortized (loan is paid off over the term of the Note). If the Seller Note is set to Interest Only, the Rate Adjustment could be set prior to the end of the Term to provide incentive to pay the Note off before the end of the Term.
Inventory is unused material and supplies used to create finished product as well as unsold finished product.
Inventory includes Work in Process which will include allocated manufacturing labor as well as the direct materials and supplies of unfinished Finished Product.
Unsold completed Finished Product Inventory includes allocated direct manufacturing labor as well as the direct materials and supplies.
Cash paid to create inventory (see Inventory - Future Terms Set-up) or User capitalized expenses (see Info Browser - Individually Scheduled Income/Expense, Capitalized Expenses) is counted as an Inventory Asset and not counted as an Expense in either the ThruThink® Accrual or Cash Basis method of accounting (see Info Browser - Tax Rates). Therefore when the User chooses the ThruThink® Cash Basis for calculation of income taxes, cash paid for inventory will not be counted as an expense for income tax purposes.
Inventory Replenish
When Inventory is written off, including the Initial Inventory at the time of Company acquisition, the User can specify how much should be replenished the next year and how many weeks it should take to replenish.
The Year 0 Inputs pertain to the Initial Inventory write off at the time of Company Acquisition (See Asset Input page).
For the Weeks to replenish, enter a whole number between 0 and 52. Specific calculations only are made for years 1-3. Week to Week calculations are only made for Years 1-3.
The Inventory replenish amount is in addition to the normal amount of inventory being generated for the current year sales therefore there it causes a greater demand on cash flow. The greater amount to replenish and the shorter time desired, the greater impact on cash flow requirements.
COGS to be Inventoried
Generally when a product is manufactured or purchased for resale, the cost of the item will be put into inventory as an asset. When the item is then sold, or combined with other items and sold, the cost of the item(s) will be taken out of inventory and expensed as a part of Cost of Goods Sold (COGS).
The total COGS for the item sold however will also contain other costs that are incurred at the time of sale such as packaging, shipping etc. The percent of COGS to be inventoried therefore is the percent of the total COGS that are expenses purchased for inventory to be used at a later date.
Beginning Inventory
This is the average time over which the Inventory will be held for use. Use will be evenly over this time. This will apply to Beginning Inventory balances only, after which, the input for Future Ave Weeks to Hold will be used for the Horizon Years. If there is no selection for the future years, the default for future years will be the selection indicated for the initial inputs on the Transaction Sheet. If this is left blank, 0 will be used and no inventory will be held for use.
If the Existing Company is purchasing the Target Company, for Year 1, a weighted average will be calculated between the Weeks to Hold listed on the Transaction Sheet for the Target Company and the Weeks to Hold listed for the initial input for the Existing Company. For Years after Year 1, the selections in the Ave Weeks to Hold in the Future Input will be used with no weighted average calculation. If there is no selection indicated in the Transaction Sheet, the initial input for the Existing Company will be used for future years.
This Input is found in the Inventory Set Up pages for the Transaction Sheet and the Existing Company Inventory Beginning Balances.
Inventory Future Weeks to Hold
This will apply for future Horizon Period years selected by the User.
Weeks to Hold are the number of weeks on average that will be Inventory is required to be kept on hand (not used).
For example, with Inventory, if cash is used to manufacture or purchase Inventory and is sold 30-60 days later, then the Weeks to Hold should be 6.
This input is found in the Inventory - Future Terms Set-Up Input page
The Input should be a whole number and not a portion of a week.
At times it may become necessary to remove a certain amount of Inventory that have become unusable.
In some businesses, there may be the need to have a standard allowance for this on an annual basis or on a multi-year basis (such as every other year). This is a non essential voluntary input option.
The write off amount will reduce the Inventory and increase expense at the end of the year of the write off.
This option is found in the Inventory - Future Terms Set-Up Input Page.
Accounts Payable (A/P) are normal operating expenses incurred by the Company that have not yet been paid. Accounts Payable are a common part of the normal operations of most companies.
In the calculations, expenses will be recognized when they are incurred, not necessarily when they are paid. When an expense is incurred and not paid, the amount of the expense becomes an Account Payable (AP). Increasing A/P's is considered a source of cash similar to obtaining a loan for the expenses not paid. The User may enter an estimate for the % of expenses that will not be paid at the time they are incurred in the Accounts Future Terms Set-Up page in the Debt Input page.
Accounts Payable are generally categorized by Less than 30 days, 30-60 Days, Over 60 Days. Days to pay may be selected by the User.
The Beginning Accounts Payable are obligations of the Company as of the Company purchase date (Effective Date).
Beginning Accounts Payable are usually not part of an asset only Company purchase. If they are however, the purchase price (for the purposes of this funding analysis) should be increased and the A/P's are then shown as a source of financing the Company purchase.
The Beginning A/P's will flow into the 1st year cash flow calculations and be paid in accordance with the User Inputs in the Accounts Payable Future Terms Set-up.
If EBITDA Override is in effect:
If the User has chosen to override Sales and Cost of Goods Sold with a direct EBITDA override, the A/P will be the prior year ending balance, therefore there will be no change in A/P with an EBITDA override. The A/P's may be manually changed however by using an Adjusting Journal Entry (AJE).
Accounts Payable Percent Calculation
This can be found in the Weekly Cash Flow Detail.
Accounts Payable (AP) as a percent of COGS, Overhead and Increase in Inventory expense is the result of the Accounts Payable - Future Set-Up Factors (See Information Browser) chosen by the User. The actual percent comes from the final A/P balance derived from a weekly cash flow analysis divided by the Annual COGS, Overhead and increase in Inventory.
When expenses are paid consistently on a weekly basis this percentage number will be small as it is a percent of weekly expenses as A/P's divided by the total expenses for the year.
When expenses are paid consistently on a monthly basis this percentage number will still be small, however it will be bigger than the number based on a weekly pay cycle.
As the days to pay the A/P's as entered on the Accounts Payable Future Terms Set-Up page increases over 30 days, the percentage of total annual expenses will of course increase.
The percentage calculated from Year 3 is used for the balance of the Horizon Years.
Beginning Weeks of Cash on Delivery (COD)
These are the Weeks that all expenses are to be paid as Cash on Delivery (COD) for each Year. This will begin in Week 1 and continue for as many weeks as indicated by the by the User. This is generally for startup situations with no credit history or troubled companies with bad credit history.
% A/P Type Expenses in Cost of Goods Sold (COGS) Inventory in the Individually Scheduled Input Page
There are two ways to input COGS. The first being the Specifically Scheduled Input Page and the second being as a % of Sales, inputted either on the Transaction Input page or the Cash Flow Control page. This is the % of Capitalized Inventory that was inputted in the Specifically Scheduled Input Page which is paid beyond 7 days or more of Inventory creation (Purchased or Mfg). These expenses will be considered as Accounts Payable and will be paid as selected in the A/P section. Cannot be greater than 100%.
% A/P Type Expenses in Non Inventory Cost of Goods Sold (COGS) expenses in the Individually Scheduled Input Page
This is the % of non inventory expenses that was inputted in the Specifically Scheduled Input Page which are paid after 7 days or more. This % will be considered as Accounts Payable and will be paid as selected in the A/P section. If the Historical Worksheet is completed, this % can be found there. Items that should be considered paid within 7 days of manufacture would be labor or COD items.
% A/P Type Expenses in Purchased/Mfg COGS Inventory
For COGS expense that is entered as a % of Sales this input is the % of Inventory purchased or manufactured to meet that COGS expense that can be paid after 7 days or more of manufacturing. This % will be considered as Accounts Payable and will be paid as selected in the A/P section. If the EBITDA Worksheet is completed, this % can be found there. Items that should be considered paid within 7 days of manufacture would be labor or COD items.
% A/P Type Expenses in Non Inventory COGS Expenses
This is the % of non inventory COGS expenses as a percent of Sales that can be paid after 7 days or more. This % will be considered as Accounts Payable and will be paid as selected in the A/P section. If the EBITDA Worksheet is completed, this % can be found there. Items that should be considered paid within 7 days of manufacture would be labor or COD items.
% A/P Type Expenses in General Overhead Operating Expenses
This is the % of non inventory, non COGS general operating and overhead expenses that can be paid after 7 days or more. This % will be considered as Accounts Payable and will be paid as selected in the A/P section. If the Historical Worksheet is completed, this % can be found there. Items that should be considered paid within 7 days of manufacture would be labor or COD items.
Pay Frequency
Insert the frequency of paying Accounts Payable, every Week or once per Month.
Accounts Payable Categories (Type)
For the Future Years, there can be three types of A/P's. The User may designate the Name of each Type. Generally the Types would be Due within 30 Days, Due 30 - 60 Days and Due Over 60 Days.
Starting AP at Beginning of each Year - Days to Pay
These are the Type Names and Days to Pay for each Type of A/P that existed at the beginning of the year. This would be highly unusual, but the User can defer until the next year by inputting 365 days. The amounts are derived starting from the Beginning A/P's at the Effective Date and are calculated each year thereafter in accordance with the User Input selections
Days to Pay Within
These are the Days to pay the Accounts Payable that are created during the operating year. Although unusual, the User may defer payment until the following Year by inputting 366 Days. For payment each week, payments will be made the indicated days after the end of the current week. For payments each month, payments will be made the indicated days after the end of the current month. Example; Pay the Type 1 A/P's (due within 30 days), 20 days following the month end (or 3 days following the week end), Pay the Type 2 A/P's 50 days after the Month end, etc.
Percent to Pay
This is the percent of each Type of A/P to pay during the year. Example; Pay 50 percent of the A/P's as Type 1 (Due within 30 Days) and 50% as Type 2, or 80% as Type 1, 10% as Type 2 and Type 3 will default to 10%.
Accounts Receivable and Inventory may be used individually as collateral for credit lines.
This feature may be turned on or off by clicking the applicable check box(s) in the Accounts Receivable and Inventory sections of the Cash Flow Control page (see Workflow/Cash Flow Control Page). When these boxes are checked, the credit lines become available and use the Leverage Ratios, Loan Reserve and Interest Rates found in the Accounts Receivable Future Terms Set-up and/or Inventory Future Terms Set-Up tables (see Information Browser). Once activated and the future terms set-up tables have been populated as desired, the credit lines will automatically draw and payoff (sweep) between the credit lines and the cash account on a weekly basis.
The limit on these lines are established by the Leverage Ratio and the Loan Reserve amounts. There is an overall maximum limit input for each of these credit lines, however the default for this input is blank and a blank input will provide no maximum limit for these loans.
The monthly peak amounts for these credit lines are illustrated in the Annual Budget Report The indicated peak amounts may be used to establish the overall maximum requirements with the lender. After the appropriate maximums are determined, an input for the overall maximum may be entered for the Accounts Receivable and Inventory Lines of Credit in their respective Future Terms Set-Up tables (see Information/Browser tab).
The beginning Balance for Accrued Interest Liability is entered with the Existing Company beginning debt in Step 6.
An Accrued Interest Liability can be generated automatically for some of the Debt accounts when interest is not automatically paid each year. Other Current Debt and Seller Debt are two such debts. General adjustments to Accrued Interest Liability may be made with an AJE (Debit/Credit) to the individual Debts that have separate Accrued Interest Liability accounts or to a general Other Accrued Interest Liability.
Direct payments to Accrued Interest Liability is made with an AJE (debit), (see Step 7 - Adjusting Journal Entries). When Accrued Interest is paid with an AJE, it becomes a cash payment and that amount is included with the Regular Interest paid. Accrued Interest liability for a particular debt whether or not created with an AJE, will be paid down by additional payments for that debt in the Cash Flow Control page.
For the Transaction Sheet Accounts Payable provision and Other Debt category, each have a provision for indicating it to be assumed Seller Debt. If this is indicated by the User, the Assumed Seller Debt will be reflected and attributed to the Sellers Value in the Acquisition Closing Statement as value received by the Seller from the Sale.
This is usually a Line of Credit that is based on a point in time Borrowing Base type of repayment.
In the ThruThink® analysis, the Accounts Receivable and Inventory Debt is based on a Line of Credit structure that would feed into a Borrowing Base type of credit structure.
A Borrowing Base includes the Collateral Value securing the Line of Credit such as Accounts Receivables and or Inventory, less any reserves. The Lender will advance the Loan to Value percentage against the Borrowing Base (Collateral Value less Reserves).
For Accounts Receivables, the Lender can have control of the receipt of the Accounts Receivable whereby the Company's customers pay directly to the Lender (as in a Lock Box arrangement). In any case, as the Accounts Receivable are received, the loan is directly reduced. To redraw funds on the Line of Credit, the Accounts Receivables are again calculated and the value applied to the Borrowing Base process and any new loan funds in excess of the existing loan balance is made available by the Lender to the Company.
For inventory, when the inventory is sold, either cash or a receivable is created. If cash is received, the inventory loan should be reduced. At a point in time, the Inventory is calculated and the value applied to the Borrowing Base process along with the updated Accounts Receivables and a new allowable loan balance is calculated for both the Inventory and Accounts Receivables and compared with the existing loan balance. If the allowable loan balance exceeds the existing loan balance, the excess loan amount would be available for the Company to draw, if the Existing Loan exceeds the Allowable Loan balance, the Company pays the loan down to the allowable balance.
There are many variations of the above for Lines of Credit involving a greater or lesser amount of control by the Lender depending on the financial health of the Company and the Company's relationship with the Lender. The intention of the Accounts Receivable and Inventory Debt is to simulate the intertwined flow of money from purchasing Inventory to collection of Accounts Receivable. At any point in time, the amount of the loan outstanding should always be in accordance with the terms indicated by the User.
Annual Payments on the Transaction Sheet Building & Improvement Debt will be the interest on the outstanding balance of the loan at the prior year end plus principal. The amount of the Principal is calculated by dividing 1 by the remaining years of the loan. Example:
10 year Loan:
Year 1 principal repayment will be 1/10 or 10%
Year 2 principal repayment will be 1/9 or 11.1%
Year 3 principal repayment will be 1/8 or 12.5%
There is a provision in the Cash Flow Control that allows the User to be able to increase the loan (or additional payments) during the life of the original life of the loan. When an advance on the loan is made after the original loan is made, the loan duration is reset to the original term. Because of this the principal repayment calculation floats with the remaining years of the loan.
The provision of additional advances and payments is reflective of a Line of Credit situation that provides the ability to make additional advances and paybacks. It also allows the User the flexibility and cash flow insight to adjust the loan amounts as Cash Flow indicates and test different scenarios in future years.
In all cases, if a Balloon Year is indicated by the User, the remaining balance of the loan is paid off in the Balloon Year. This will include advances that may have been made only the year before.
If other principal repayment options including amortized, level principal, monthly payments, quarterly payments, etc are required by the User, the Individually Scheduled Item Input option should be used.
For the debts on the Transaction Sheet, the question, "Will this loan be funded at Close of Escrow or as of the Effective Date?" is asked upon debt detail input.
If Yes is selected, the funds from the loan will be available as cash flow for the Close of Escrow and become part of the capital used to purchase the Company and provide the beginning Working Capital.
If No is selected, the loan will not be funded during the Close of Escrow, however the terms as entered in the debt setup will apply for the future.
There are two methods for making extra payments or draws on Debt, the Cash Flow Control page and the Adjusting Journal Entry process (AJE).
A positive number is entered for Payments and a negative number for Draws.
Debt transactions come from the Transaction Sheet, the Existing Company if applicable or from a series of individual loans identified in the Individually Scheduled Input page.
Additional payments will be 1st applied to accrued interest and then to principal balance except for the Seller Debt. Please refer to Seller Debt payment allocation discussion below.
Cash Flow Control
These Inputs are intended to be a cash flow and debt management tool. Debt pay down made directly to the debt on the Cash Flow Control page is in addition to any regularly scheduled payments on this debt as inputted by the User when this debt was setup. This provision allows surplus cash to be applied to pay down debt or if applicable, drawing new debt to supplement cash.
Transaction Sheet Loans
Payments will first reduce Transaction Sheet loan, then allocated to each of the Individual Scheduled Loans in proportion to the individual loan balances at the time of payment.
Draws on Transaction Sheet Loans, if during the original term of the loan, will re-set the original loan term. If the Draw is made after the term expires, the draw is paid back the next year.
Individually Scheduled Loans
Payments will first reduce Transaction Sheet loan, then allocated to each of the Individual Scheduled Loans in proportion to the individual loan balances at the time of payment.
Draws should not be made on the Individual Scheduled Loans through the Cash Flow Input page. Disbursements may be scheduled in subsequent years in the Individually Scheduled Item Input form by setting the disbursement as a separate Debt Item. An AJE disbursement may also be made specifically to an Individually Scheduled Item through the AJE Input page.
Adjusting Journal Entry (AJE) Process
Transaction Sheet Loan
For Transaction Sheet Loans, payments can be made directly to the Transaction Sheet loan.
Draws on Transaction Sheet Loans, if during the Original term of the loan, regular payments stay the same and draw balance will remain for the remaining term with unpaid balloon at end of term. If the Draw is made after the term expires, the draw is paid back the next year.
Individually Scheduled Loans
Payments can be made directly to the Transaction Sheet loan.
Draws made with an AJE can be made directly to an individual loan in each of the Individually Scheduled Loan Categories. If the draw is made during the original term of the loan, regular payments will stay the same and the draw balance will remain for the remaining term with the unpaid balance becoming a balloon at end of term. If the Draw is made after the term expires, for loan types, # 0 and 3 (Interest Only) the draw amount will be interest only and remain until paid off with another AJE. For loan payment types #1 and 2 (Amortized and Level Principal), Draws are not allowed before the loan is scheduled to begin or on or after the loan is paid off.
For both the Cash Flow Input page and the AJE process, Draw balances need to be managed with subsequent payments through the Cash Flow Input pages and the AJE process as the regular payments only manage the original loan balances.
A Cash Flow adjustment or AJE that creates a negative loan amount may cause an error or create a warning.
Other Transaction Debt
Since there is a provision for multiple loans in this category, payments will be applied to each loan in the category in proportion to the outstanding balance of each loan at the time of the payment, 1st to any accrued interest and then to principal in proportion of each loans balance to the total.
Draws may be made to this category of loans but any draw will be applied to the first loan in the category only. Enter a negative number for a draw. A draw during the term of the 1st original loan in the category will fall under the remaining term of the original Loan with the same stated Interest Rate and payment terms.
If a draw is made and the regular payments plus any extra payments do not pay off the loan at the end of the term, the balance will be paid off at the end of the stated term in a balloon payment.
If individual activity (Payment or Draw) is needed for each loan in the category separately, an AJE may be made to each specific loan.
If a draw or AJE is made for a period after the loan term is expired and the original loan has been paid off, the amount of the Cash Flow adjustment or AJE will create a loan balance until adjusted again with either a Cash Flow Sheet adjustment or another AJE. Interest will be paid on the balance annually until paid off with either another Cash Flow Sheet adjustment or AJE.
A Cash Flow adjustment or AJE that creates a negative loan amount will create an error.
Other Current Debt - General Amounts
Other Current Debt is considered short term due to be paid within 12 months and can be reported with two methods. A general category can be reported for the Transaction Sheet and the Existing Company and more detailed information may be reported on the Individually Scheduled Other Current Debt input forms. For more detail, see 'Other Current Debt'.
The general debt portion comes from inputs in Step 6 for the Transaction Sheet and/or the Existing Company. The Individually Scheduled amounts come from a series of individual loans identified in the Individually Scheduled Debt Input page also available in Step 6 for both the Transaction Sheet or the Existing Company.
The initial General Other Current Debt from the Transaction Sheet and the Existing Company will be combined together after the Effective Date. If the Credit Limit input for Other Current Debt in Step 6 is left blank, the General Other Current Debt will stay constant through Year 1 and be paid off in Month 12 of Year 1.
There is an annual Credit Limit input on the Other Current Debt page (see Info Browser). When the General Credit Limit input is greater than '0', the General Other Current Debt amount will roll into a Credit Line facility with weekly automatic draws and payments to the cash account (See Other Current Debt - Credit Line for further description).
Overall manual adjustments to the General Other Current Debt category may be made on the Cash Flow Control page. Increases made from the Cash Flow Control page will take place in Month 1 and decreases will take place in Month 12.
The Cash Flow Control (see Browser - Workflow) adjustment for Other Current Debt can be used to increase or decrease the General Other Current Debt portion. Increases from the Cash Flow Control page will be applied 1st to the Credit Line up to the Credit Limit, then to the non-interest bearing portion of the Other Current Debt section (see Information Browser, Other Current Debt Balance).
Other Current Debt - Credit Line
The Credit Line feature of ThruThink® may be turned on by entering a Credit Limit amount In Step 6 which will apply to the portion of the beginning Other Current Debt entered that is not a part of the Individually Scheduled Other Current Debt.
Other Current Debt - Individually Scheduled
The Individually Scheduled Other Debt are individual short term liabilities that are either beginning balances or funded in specific months for each year of the Horizon Period and are paid 12 months later. Each separate debt item may have a different interest rate or none at all. See Help Browser for more detail, Other Current Debt - Individually Scheduled.
The entire category may be renewed (not paid off) each year by selecting 'Yes' for any given year in the Other Current Debt Detail page (see Information Browser). This will extend all of the Individually Scheduled monthly anniversaries for that year for 12 months (see Other Current Debt).
The Cash Flow Control (see Browser - Workflow) adjustment for Other Current Debt can only be used to pay down the Individually Scheduled Debt portion. Increases from the Cash Flow Control page will be applied 1st to the Credit Line up to the Credit Limit, then to the non-interest bearing portion of the Other Current Debt section (see Information Browser, Other Current Debt Balance).
Adjusting Journal Entries may be made to either increase or decrease the Individually Scheduled Debt (see step 7).
Other Current Debt - Non Interest Bearing Portion
The initial balance will come from the Other Current Debt total imported from other projects when Combine Other Projects feature is used. This feature is not currently available.
Specific Increases or Decreases to this category may be made with an Adjusting Journal Entry (see Step 7) for each year of the Horizon.
Other Debt
Other Debt can only be created by using the Individual Scheduled Item Debt Set up and selecting Other Debt as a category.
Draws on Other Debt are not available through the Cash Flow Input page. Because Other Debt is an Individually Scheduled Item and has no Transaction Sheet portion, when a Cash Flow Control Draw is made to Other Debt, there is no identification to one of the Individually Scheduled Debt Items and the Cash Flow Draw will be immediately paid off in the same year. A Cash Flow Draw to Other Debt will have no effect. With all the other Individually Scheduled Items, they all have Transaction Sheet portions and a Cash Flow Draw will be applied to the Transaction Sheet loan.
Disbursements may be scheduled in subsequent years in the Individually Scheduled Item Input form by setting the disbursement as a separate Debt Item. An AJE disbursement may also be made specifically to an Individually Scheduled Item through the AJE Input page. A draw will fall under the remaining term of the loan with the same stated Interest Rate and payment terms.
If a draw is made and the regular payments plus any extra payments do not pay off the loan at the end of the term, the balance will be paid off at the end of the stated term in a balloon payment.
If individual activity (Payment or Draw) is needed for each loan in the category separately, an AJE may be made to each specific loan.
Seller Debt
Excess Cash Pay down will be 1st applied to outstanding interest on the Non-Current Pay Seller Note, then principal on the Non Current Pay Seller Note, then to the outstanding interest of the Earn Out Seller Note, then, if the Earn Out Seller Note is not amortized, the principal of the Earn Out Seller Note, then to interest of the Current Pay Seller Note, then to the principal of the Current Pay Seller Note.
Automatically paid means that the payments are paid automatically in accordance with the debt terms Input. A "Yes" selection will cause payments to be automatically paid. A "No" selection will mean that the interest will be accrued, but the cash payments must be manually entered in the Cash Flow Control Input Sheet. This allows the User to provide payment on the Note in accordance with projected available cash in whichever year and amount desired by the User. Manual payments will be first applied to accumulated interest and then to principal.
A Balloon is when the loan matures (becomes due) prior to the end of the term indicated. In this case, the term is used to determine the amount of the loan paid back each year, but the Balloon Year will determine when the loan becomes due. The remaining balance on the loan is due at the end of the Balloon Year. For the Balloon Year to have any effect it must be less than Term of the loan. Example: a 30 year loan has a Balloon in 10 years, means that the loan payments are as if it were a 30 year loan, but the loan actually is due in 10 years.
Debt Service Coverage is expressed as a ratio called the Debt Service Coverage (DSC) Ratio. This can be calculated differently depending on what information is desired. To express the DSC Ratio as an indication of how normal earnings from the business can cover the debt payments, the DSC is calculated in ThruThink® by dividing the Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA) from the business by the Total Interest Expense plus Principal payments on Long Term Debt. A common target for this calculation is 1.25:1. This calculation is found in ThruThink through the Information Browser - Sources and Uses of Cash.
Debt Service Coverage is often expressed as Cash Available for Debt Service which in ThruThink® is calculated on a Trailing Twelve Month (TTM) basis. If the User has entered the Actuals for Last Year and the Actuals for Year to Date This Year, the ThruThink® calculation uses the TTM EBITDA less the TTM Non Financed Capital Expenditures plus the TTM Capital Contributions and less the TTM Capital Draws and divides this by the Total TTM Interest Expense plus TTM Principal Payments on Long Term Debt. This latter calculation is often used by Lenders as a loan covenant. A common goal for this ratio is also 1.25:1. This calculation is found in ThruThink® through the Information Browser - Projection Guidance to Actual to Date.
It is a useful exercise for the User to see what the Projection shows for a Trailing Twelve Month Debt Service (TTM DSC) calculation for Year 1 by itself. This can be seen by when a blank is entered as the current month on the Projection to Actual Comparison Page (see Information Browser). Going back to the Projection Guidance to Actual to Date page, the TTM DSC calculation can by seen on the right portion of the page under Month 12.
In the Equity Note section of the Cash Flow Control page, extra cash can be applied to the Equity Note. Extra payments to the Equity Note will be applied first to accrued interest on Current Input Equity Debt, then to Principal on Equity debt, then to Accrued interest on any Combined Multiple Projects Equity debt, then Principal on the Combined Multiple Projects Equity debt.
When setting up the Equity Note, the User may choose to Input a % Origination Points Fee for the Note. Because the % Points Fee becomes a Cash Requirement in the Closing Escrow, when a % Points Fee is used for the Equity Note, changing the amount of the Equity Note will cause the Cash Requirement to close the escrow to go up or down based on the amount of the % Points Fee change.
When using the Equity Note to provide the final amount of the Cash Requirement, as the Equity Note increases the Cash Requirement will also increase due to the % Points Fee, causing a never ending (although increasingly smaller) chase to provide the remaining Cash Requirement.
Either use the direct Cash Contribution to satisfy the final Cash Requirement or make several rounds of increasing the Equity Note amount to satisfy the Remaining Cash Requirement and again increasing the Equity Note amount for the resulting Remaining Cash Requirement until the Remaining Cash Requirement gets small enough to put in a direct Cash Contribution to finish the process.
For the General Debt Input, each category will have separate repayment processes as follows:
The Accounts Payable will be paid in accordance with the Future Terms Set-Up inputs for Accounts Payable.
The initial Beginning Accrued Interest (as of the date of the Existing Company balance sheet) will be automatically paid the following year. Continuing Accrued Interest can be managed through the AJE process with an Other Interest Accrual AJE.
The General A/R Debt will be combined with any other A/R Debt inputted elsewhere and paid in accordance with the Accounts Receivable Future Terms Set-Up inputs for the Accounts Receivable Line of Credit.
The General Inventory Debt will be combined with any other Inventory Debt inputted elsewhere and paid in accordance with the Inventory Future Terms Set-Up inputs for the Inventory Line of Credit.
Other Current Debt is considered short term due to be paid within 12 months and can be reported with two methods. A general category can be reported for the Transaction Sheet and the Existing Company and more specific information may be entered with the Individually Scheduled Other Current Debt process. For more detail, see Help Browser, Other Current Debt.
The General Other Current Debt can be governed by a Credit Limit input. If there is a Credit Limit entered by the User, for years 1-3, there is an automatic Draw or Payment feature. In addition to the automatic feature in years 1-3 and for years after year 3, Draws and Payments can be made using the Cash Flow Control page as well as the Adjusting Journal Entry features.
The Other Long Term Debt has no automatic repayment process and the balance will remain until changed through the AJE process.
The Deferred Tax Liability has no automatic repayment process and the balance will remain until changed through the AJE process.
Purchase the Target Company
When purchasing the Target Company, the Target Company's Sales, EBITDA, the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Target Company are entered on the Transaction Sheet through the Transaction Sheet input pages. The Equity Structure for the ownership of the Target Company is entered in Step 8 for the purchase and will flow to the Transaction Sheet.
Purchase the Existing Company
When purchasing the Existing Company, the Existing Company's Sales, EBITDA, Assets and Liabilities are entered on the Existing Company Input Sheet and the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Existing Company is entered on the Transaction Sheet. The Equity Structure entered in Step 8 for the purchase will flow to the Transaction Sheet.
When purchasing the Existing Company, the Debt and Equity required to acquire the Existing Company should be entered using the Transaction Sheet options. This is new acquisition debt as well as new Existing Company debt (after the Effective Date). In this manner, for example, if there are assets at the Existing Company that can be used for additional debt after the Effective Date, the additional debt should be entered on the Transaction Sheet and those proceeds as well as Equity Debt and or the Contributions from outside Equity will become part of the capital structure assembled to acquire the Existing Company. After the acquisition, all the debt and equity from both the Transaction Sheet and the Existing Company will be rolled into the post closing Balance Sheet.
Existing Company Purchases the Target Company
When the Existing Company is purchasing the Target Company, the Transaction sheet is used for the Target Company Information and the Existing Company Input Sheet is used for the Existing Company. The Existing Company must be listed (using exact Existing Company name) as one of the Equity Partner Groups on the Transaction Sheet through the Equity Input page. Any cash required of the Existing Company Equity as an equity member will be taken from the cash listed on the Existing Company Input page. If there is not enough cash in the Existing Company's balance sheet, the Existing Company Equity Partner cash contribution above the cash amount shown on the Existing Company Balance Sheet will not be allowed as a cash input on the Transaction Sheet Equity Input.
Because information from the Transaction Sheet and the Existing Company Sheet are combined into the post Closing (Effective Date) Balance Sheet, if the Existing Company is purchasing the Target Company both the Sales and EBITDA information entered in Step 3 for the Existing Company and the Target Company will become the base information going forward as of the close of escrow or the Effective Date. Care should be taken not to duplicate and Sales or EBITDA information between the Target Company and the Existing Company.
As noted above in purchasing the Existing Company, when the Existing Company is Purchasing the Target Company, if there are assets at the Existing Company that can be used for additional debt to acquire the Target Company, the additional debt should be entered using the Transaction Sheet option and the proceeds will become part of the capital structure assembled to acquire the Target Company. The Transaction Sheet Debt will be combined with the Existing Company Debt after the Effective Date (Acquisition Date). The additional debt the Existing Company raises on its own assets as well as the assets of the Target Company and equity debt/contributions from the Equity Groups to provide cash to purchase the Target Company can be seen on the Information Tab Transaction Views through the Transaction Deal Structure and Transaction Buyers and Sellers Statement.
The total of the Individually Scheduled Debts listed in these forms will be sent to either the Transaction Sheet or the Existing Company (Location) as indicated by the User Inputs.
After the Effective Date, these loans will be rolled into one Line of Credit at each Location. Each Location will have one average Interest Rate, Loan to Value and Ineligible percentage. The inclusion of separate individual loans in the Individual Item Schedule is only intended to provide the User a detail of the consolidation of a number of Items into one Line of Credit.
See Accounts Receivable - Future Terms Set-Up for the inputs that will apply to the future line of credit.
The separate Loan to Value and Ineligible Inputs are for information purposes only in order to provide the Weighted Average calculations as a guide for the Inputs for the Future line of credit.
The total of the Individually Scheduled Debts listed in these forms will be sent to either the Transaction Sheet or the Existing Company (Location) as indicated by the User Inputs.
After the Effective Date, these loans will be rolled into one Line of Credit at each Location. Each Location will have one average Interest Rate, Loan to Value and Ineligible percentage. The inclusion of separate individual loans in the Individual Item Schedule is only intended to provide the User a detail of the consolidation of a number of Items into one Line of Credit.
See Inventory - Future Terms Set-Up for inputs that will apply to the future line of credit.
The separate Loan to Value and Ineligible Inputs are for information purposes only in order to provide the Weighted Average calculations as a guide for the Inputs for the Future line of credit.
These loans will be rolled into one Line of Credit in the future with one average Interest Rate and Leverage Ratio as identified in the Accounts Receivable Future Factors Input. Use the Weighted Average calculated and shown on the Asset Input page as a guide for the inputs for future years.
These loans will be rolled into one Line of Credit in the future with one average Interest Rate and Leverage Ratio as identified in the Accounts Receivable - Future Terms Set-Up Input. Use the Weighted Average calculated and shown on the Asset Input page as a guide for the inputs for future years.
The Individually Scheduled Other Debt are individual short term liabilities that are either beginning balances or funded in specific months for each year of the Horizon Period and are paid 12 months later. Each separate debt item may have a different interest rate or none at all.
During Debt Setup, the Individual Scheduled Items can be applied to either the Transaction Sheet or directly to the Existing Company.
The entire category may be renewed (not paid off) each year by selecting 'Yes' for any given year in the Other Current Debt Detail page (see Information Browser). This will extend all of the Individually Scheduled monthly anniversaries for that year for 12 months (see Annual Renewal below).
If the Funding Year input is left blank, it will be paid in Year 1 in the funding month indicated. To fund loans in future years, place a year input for Funding Year and it will funded in that year in the Funding Month indicated and be paid 12 months after the indicated funding month.
If the Funding Month is left blank, it will be funded in month 12 of the year indicated. The entire category may be renewed (not paid off) each year by selecting 'Yes' for any given year in the Other Current Debt Detail page (see Information Browser). This will extend the monthly anniversaries for 12 months.
The month selection will only apply during years 1-3 since the Monthly Cash Flow is only available for those years, however the Funding Year selection will apply for each year of the Horizon period.
The interest is paid annually at each of the liabilities anniversary date.
An overall manual payment adjustment to the category may be made on the Cash Flow Control page or with an Adjusting Journal Entry.
The Cash Flow Control (see Browser - Workflow) adjustment for Other Current Debt can only be used to pay down the Individually Scheduled Debt portion. Increases from the Cash Flow Control page will be applied 1st to the Credit Line up to the Credit Limit, then to the non-interest bearing portion of the Other Current Debt section (see Information Browser, Other Current Debt Balance).
Adjusting Journal Entries may be made to either increase or decrease the Individually Scheduled Debt (see step 7).
Both the Cash Flow Control payments and Adjusting Journal Entries for the Individually Scheduled Other Current Debt will take place in Month 12 of the applicable year.
If this debt is due in a period longer than 12 months from the Effective Date, the User should choose one of the Other Long Term debt categories for this debt. In this manner, the debt will be then considered a Long Term Debt on the Balance Sheet.
Negative Amounts - Changing the 12 Month Anniversary Payoff
Negative amounts for Loans are used to move the 12 Month Anniversary Payoff payment month. This should only be used when the Renewal is set to 'No' for the year involved.
By default, the payoff for each Individually Scheduled Other Current Loan will be paid off (unless renewed) in the next year (Payoff Year), 12 months after the Funding Month.
If the payoff needs to be earlier in the Payoff Year, enter a negative loan amount for the payoff in the month needed and enter the Payoff Year as the Funding Year and enter 'Move' in the Description Field for that amount. Enter another corresponding positive amount in the 12 month anniversary month in the Payoff Year for the original loan amount and also enter 'Move' in the Description Field for that entry as well. This effectively moves the payoff from the original 12 month anniversary month to the new required month in the Payoff Year. This option should only be used when the Renewal is set to 'No' for the year with the negative amounts.
If the payoff needs to be later in the same year as the Funding Year and not in the Succeeding Year, enter a negative loan amount for the payoff in the month needed (must be after the Funding Month of the original loan) for the Funding Year and enter 'Move' in the Description Field for that amount. Enter a positive amount in the 12 month anniversary month of the original loan in the Succeeding Year and also enter 'Move' in the Description Field for that entry as well. This effectively moves the payoff from the original 12 month anniversary month to the new required month in the same year as the Funding Year. This option should only be used when the Renewal is set to 'No' for the year with the negative amounts.
Please note that when entering negative amounts to move the payment month, it is important to enter 'Move' in the Description Field for both the positive as well as the negative adjustment amounts.
Annual Renewal
For the Individually Scheduled portion of the Other Current Debt, there is an annual selection on the Other Current Debt page (see Information Browser - Other Current Debt Balance Detail). For each year of the Horizon, by selecting 'Yes', the entire category will be renewed and the loan anniversaries will all be extended by 12 months.
This debt is represented on the Balance Sheet under Current Debt even if renewed every year. It will be considered due within 12 months at all times.
The Individual Item Schedule is intended to provide the User the option of identifying in more detail six separate specific items of Subordinated Debt.
Each Item balance begins at the Effective Date and the User inputs the remaining payments, the interest rate and the type of payment. The amount of each remaining payment is calculated and summarized into annual amounts. The interest becomes an expense, the principal reduces the debt on the Balance Sheet and the Interest and Principal amounts both reduce the Cash Flow.
On the Individually Scheduled Item Input page, there are four separate repayment options, Interest Only, Amortized Level Payment, Level Principal plus Interest.
For each Item, the User may direct the Item to flow to one of the following choices (Show On choice):
1. Transaction Sheet
Choosing the Transaction Sheet for the Show On selection will send the individual Item to the Transaction Sheet to be used however the Transaction is being used, ("Purchase the Target Company", "Purchase the Existing Company" or "The Existing Company Purchases the Target Company"
2. Existing Company
Choosing the Existing Company for the Show On selection will send the individual Item to the Existing Company Input Section to be included in the Beginning Existing Company Balance Sheet.
When purchasing the Existing Company, sending debt to the Transaction Sheet will be debt in addition to the Existing Company and can represent the added debt required to provide the funds to purchase the Existing Company. The transaction Sheet debt will be added to the Existing Company debt after the Effective Date.
3. Existing Company Sheet-Adjustment
Choosing the Existing Company-Adjustment for the Show On selection will send the individual Item to the Existing Company Input Section but put it into the Adjustment Column next to the Beginning Existing Company Inputs. The purpose for the Adjustment is to allow the user to add debt Items to the Existing Company in order to "restructure" the Beginning Existing Company debt structure.
This becomes useful when an existing Company Debt needs to be paid off with a new debt in accordance with a restructure plan. In this manner, the restructure happens before the Effective Date and the future years will reflect the results of the debt restructure.
Year of Funding
This indicates the year the loan is funded. For the Beginning Effective Date, it can be left blank or a '0' can be entered. A '1' would indicate the loan is funded during Year 1, etc.
For Monthly cash flow purposes, loan funding will be at the mid point of the year indicated. Accrued interest for the remaining half of the year will be calculated and included in Accrued Interest Income and Accrued Interest Receivable on the Balance Sheet.
Funding Month
If Loan is funded during Years 1-3, User may identify which month during those years the Loan is funded.
If no month is indicated, the loan will be funded in month 12 in the Year indicated by default.
Remaining Payments
Insert # of actual payments left for the life of the loan up to a maximum of 240 payments. If left blank, 20 years of payments will be used.
Type of Payment
0=Interest Only with no principal paid,
1=Amortize-Level payment containing both principal & interest over the term of the loan,
2=Level Principal Payment plus Interest,
3=Interest Only with all of the principal paid with last payment (balloon)
Payment for Amortized Loans, Principal amount for Principal plus Interest Loans
If, payment over the periods indicated is not enough to pay off principal & interest, the balance owed will be paid off in the last pay period. For amortized payment option, if no amount is inserted, an automatic calculation based on the factors given will be used. For Level Principal plus Interest, if no principal payment amount is inserted, interest only will be calculated.
Number of Payments per Year
Enter the number of payments/year (1-12). If # of Payments/Year is left blank, the default will be 1.
If the Remaining Payment entry is left blank, the default is 20 years of payments and there is a maximum of 240 payments allowed.
Month Payment is Due
For Annual Payments with Principal Only (Payment type #1 or 2)
This entry only will apply to Debt with annual payments (1 per year). For items other than annual payments, inputs for Month Due will default to Month "12".
The Month the payment is due is the Month # from the Effective Date, i.e., if the Effective Date is March 31 and the payment is due in June, then the Month Period Due would be 3.
For an entry prior to Month Period 12, accrued interest income and receivable asset for the remaining periods of the year will be generated.
If the Month Due is prior to month 12, the total payment will stay the same, but the amount of interest will vary and represent only the months of the year prior to and including the Month Due period. The balance of the payment will be principal and reduce the loan amount accordingly.
With a prior existing debt, accrued interest as an initial balance input should be entered as an Accrued Interest liability as of the beginning date in the Debt set up process. This would represent the months of the year after the payment in the prior year.
If this is a prior existing debt, for annual payments only, input a Month Due greater than 12, the Start Month is the month the payment was last paid last year plus 12. The interest paid will be for the 12 months after last years Payment which will include the periods from the prior year. On an accrual basis, interest paid this year for the months of last year will be reversed out of Accrued Interest Liability and accrued Interest expense (See Interest Paid detail). For example if there is a payment for an existing debt due in April (Month 4) this year and was last paid in April of last year, use a month due of 16 (April = Month 4, 4 + 12 months back = 16). 12 months of interest will be paid and expensed to Interest Expense and 8/12 of the Interest paid will be reversed out or debited to Accrued Interest Liability and lower or credit Interest Expense.
An automatic accrual entry will be made crediting Accrued Interest and debiting Interest Expense for the months after the Month Period for each Yr beginning with Yr 1. This input is then automatically reversed the following year. See Interest information form for the detail of these entries.
The Individual Item Schedule is intended to provide the User the option of identifying in more detail six separate specific items in each of eight different categories of Debt.
With four of the Categories, the User may select either Machinery & Equipment Debt, Buildings & Improvements Debt, Real Estate Debt or Other Long Term Debt. These User Identified Debt Categories may be assigned to either. More than one Category may be named the same if the User requires more than six debt items in one of the Categories.
Each Item balance begins at the Effective Date and the User inputs the remaining payments, the interest rate and the type of payment. The amount of each remaining payment is calculated and summarized into annual amounts. The interest becomes an expense, the principal reduces the debt on the Balance Sheet and the Interest and Principal amounts both reduce the Cash Flow.
On the Individually Scheduled Item Input page, there are four separate repayment options, Interest Only, Amortized Level Payment, Level Principal plus Interest.
For each Item, the User may direct the Item to flow to one of the following choices (Show On choice):
1. Transaction Sheet
Choosing the Transaction Sheet for the Show On selection will send the individual Item to the Transaction Sheet to be used however the Transaction is being used, ("Purchase the Target Company", "Purchase the Existing Company" or "The Existing Company Purchases the Target Company"
2. Existing Company
Choosing the Existing Company for the Show On selection will send the individual Item to the Existing Company Input Section to be included in the Beginning Existing Company Balance Sheet.
When purchasing the Existing Company, sending debt to the Transaction Sheet will be debt in addition to the Existing Company and can represent the added debt required to provide the funds to purchase the Existing Company. The transaction Sheet debt will be added to the Existing Company debt after the Effective Date.
3. Existing Company Sheet-Adjustment
Choosing the Existing Company-Adjustment for the Show On selection will send the individual Item to the Existing Company Input Section but put it into the Adjustment Column next to the Beginning Existing Company Inputs. The purpose for the Adjustment is to allow the user to add debt Items to the Existing Company in order to "restructure" the Beginning Existing Company debt structure.
This becomes useful when an existing Company Debt needs to be paid off with a new debt in accordance with a restructure plan. In this manner, the restructure happens before the Effective Date and the future years will reflect the results of the debt restructure.
Year of Funding
This indicates the year the loan is funded. For the Beginning Effective Date, it can be left blank or a '0' can be entered. A '1' would indicate the loan is funded during Year 1, etc.
For Monthly cash flow purposes, loan funding will be at the mid point of the year indicated. Accrued interest for the remaining half of the year will be calculated and included in Accrued Interest Income and Accrued Interest Receivable on the Balance Sheet.
Funding Month
If Loan is funded during Years 1-3, User may identify which month during those years the Loan is funded.
If no month is indicated, the loan will be funded in month 12 in the Year indicated by default.
Remaining Payments
Insert # of actual payments left for the life of the loan up to a maximum of 240 payments. If left blank, 20 years of payments will be used.
Type of Payment
0=Interest Only with no principal paid,
1=Amortize-Level payment containing both principal & interest over the term of the loan,
2=Level Principal Payment plus Interest,
3=Interest Only with all of the principal paid with last payment (balloon)
Payment for Amortized Loans, Principal amount for Principal plus Interest Loans
If, payment over the periods indicated is not enough to pay off principal & interest, the balance owed will be paid off in the last pay period. For amortized payment option, if no amount is inserted, an automatic calculation based on the factors given will be used. For Level Principal plus Interest, if no principal payment amount is inserted, interest only will be calculated.
Number of Payments per Year
Enter the number of payments/year (1-12). If # of Payments/Year is left blank, the default will be 1.
If the Remaining Payment entry is left blank, the default is 20 years of payments and there is a maximum of 240 payments allowed.
Month Payment is Due
For Annual Payments with Principal Only (Payment type #1 or 2)
This entry only will apply to Debt with annual payments (1 per year). For items other than annual payments, inputs for Month Due will default to Month "12".
The Month the payment is due is the Month # from the Effective Date, i.e., if the Effective Date is March 31 and the payment is due in June, then the Month Period Due would be 3.
For an entry prior to Month Period 12, accrued interest income and receivable asset for the remaining periods of the year will be generated.
If the Month Due is prior to month 12, the total payment will stay the same, but the amount of interest will vary and represent only the months of the year prior to and including the Month Due period. The balance of the payment will be principal and reduce the loan amount accordingly.
With a prior existing debt, accrued interest as an initial balance input should be entered as an Accrued Interest liability as of the beginning date in the Debt set up process. This would represent the months of the year after the payment in the prior year.
If this is a prior existing debt, for annual payments only, input a Month Due greater than 12, the Start Month is the month the payment was last paid last year plus 12. The interest paid will be for the 12 months after last years Payment which will include the periods from the prior year. On an accrual basis, interest paid this year for the months of last year will be reversed out of Accrued Interest Liability and accrued Interest expense (See Interest Paid detail). For example if there is a payment for an existing debt due in April (Month 4) this year and was last paid in April of last year, use a month due of 16 (April = Month 4, 4 + 12 months back = 16). 12 months of interest will be paid and expensed to Interest Expense and 8/12 of the Interest paid will be reversed out or debited to Accrued Interest Liability and lower or credit Interest Expense.
An automatic accrual entry will be made crediting Accrued Interest and debiting Interest Expense for the months after the Month Period for each Yr beginning with Yr 1. This input is then automatically reversed the following year. See Interest information form for the detail of these entries.
This entry only will apply to Debt with annual payments (1 per year). For items other than annual payments, inputs for Month Due will default to Month "12".
The Month the payment is due is the Month # from the Effective Date, i.e., if the Effective Date is March 31 and the payment is due in June, then the Month Period Due would be 3.
For an entry prior to Month Period 12, accrued interest income and receivable asset for the remaining periods of the year will be generated.
If the Month Due is prior to month 12, the total payment will stay the same, but the amount of interest will vary and represent only the months of the year prior to and including the Month Due period. The balance of the payment will be principal and reduce the loan amount accordingly.
With a prior existing debt, accrued interest as an initial balance input should be entered as an Accrued Interest liability as of the beginning date in the Debt set up process. This would represent the months of the year after the payment in the prior year.
If this is a prior existing debt, for annual payments only, input a Month Due greater than 12, the Start Month is the month the payment was last paid last year plus 12. The interest paid will be for the 12 months after last years Payment which will include the periods from the prior year. On an accrual basis, interest paid this year for the months of last year will be reversed out of Accrued Interest Liability and accrued Interest expense (See Interest Paid detail). For example if there is a payment for an existing debt due in April (Month 4) this year and was last paid in April of last year, use a month due of 16 (April = Month 4, 4 + 12 months back = 16). 12 months of interest will be paid and expensed to Interest Expense and 8/12 of the Interest paid will be reversed out or debited to Accrued Interest Liability and lower or credit Interest Expense.
An automatic accrual entry will be made crediting Accrued Interest and debiting Interest Expense for the months after the Month Period for each Yr beginning with Yr 1. This input is then automatically reversed the following year. See Interest information form for the detail of these entries.
Collateral is the asset that is pledged to the Lender to serve as security for the loan also referred to as Loan Security. The loan is generally a percentage of the value of the Collateral (Loan to Value Ratio) in order to allow a recovery margin in the case the lender must recover the Collateral to pay off the loan.
The Lender will usually file a Security Agreement of some type with the appropriate government jurisdiction that will secure the asset as security for the Lender. This will usually create a lien or legal encumbrance against the asset.
All of the Senior Debt categories on the Transaction Sheet of Accounts Receivable, Inventory, Machinery & Equipment, Buildings & Improvements and Real Estate Debt include a provision for an Ineligible or Reserve percentage. The loan amount calculations reduce the asset value by the Ineligible/Reserve percentage before applying the Loan to Value percentage to arrive at the amount of the Loan.
Ineligibles are the part of the asset that serves as loan Collateral that is not of reasonable value or condition to serve as loan Collateral. This can be old, spoiled or obsolete inventory, old accounts receivables or any factor that the Lender feels will hamper the ability of the collateral to be converted to cash to pay down the loan.
Loan Reserves are a reserve for any unforeseen situation that will reduce the value of the Collateral and reduce the Collateral's conversion to cash to pay off the Loan.
For Inventory, there is a provision to enter an amount for a Loan Reserve in addition to a percentage. This is useful in the case a fixed value of Inventory needs to be removed from the loan amount calculation.
Receivables from foreign Sales (customers in another country) are often considered ineligible receivables for lending purposes.
Lenders generally use some Percentage for a Ineligible/Reserve amount for certain types of Inventory (old, spoiled or obsolete inventory) and Accounts Receivables over 60 days old (possibly uncollectable).
In the ThruThink® analysis, there is an Ineligible provision for the other Senior debt categories besides the Accounts Receivables and Inventory which can be used by the User to plan for possible value differences with the lender or any reason to reduce the asset value for lending purposes. The Ineligible Input can be left empty and simply reduce the Loan to Value Ratio to accomplish the same purpose.
The Ineligible or Reserve in the ThruThink® analysis is expressed as a % of the total loan Collateral value. To calculate the amount of available loan, the loan Collateral value will be reduced by the Reserve % before the Loan to Value % is applied.
Loan to Value (LTV) or Leverage Ratio is the percent that the loan amount is to the value of the asset that serves as the collateral for the loan. Collateral is the asset that is pledged to the Lender as security for the loan.
In the case of Accounts Receivables, the collateral will be the actual receivables and subsequent collections from the Company's customers.
Common LTV's for eligible Accounts Receivables typically can be up to 80%.
Common LTV's for eligible Inventory typically can be up to 65%.
Common LTV's for Equipment & Machinery can be from 40-65% and Real Estate is often 50-80%.
Annual Payments on the Transaction Sheet Equipment Debt will be the interest on the outstanding balance of the loan at the prior year end plus principal. The amount of the Principal is calculated by dividing 1 by the remaining years of the loan. Example:
10 year Loan:
Year 1 principal repayment will be 1/10 or 10%
Year 2 principal repayment will be 1/9 or 11.1%
Year 3 principal repayment will be 1/8 or 12.5%
There is a provision in the Cash Flow Control that allows the User to be able to increase the loan (or additional payments) during the life of the original life of the loan. When an advance on the loan is made after the original loan is made, the loan duration is reset to the original term. Because of this the principal repayment calculation floats with the remaining years of the loan.
The provision of additional advances and payments is reflective of a Line of Credit situation that provides the ability to make additional advances and paybacks. It also allows the User the flexibility and cash flow insight to adjust the loan amounts as Cash Flow indicates and test different scenarios in future years.
In all cases, if a Balloon Year is indicated by the User, the remaining balance of the loan is paid off in the Balloon Year. This will include advances that may have been made only the year before.
If other principal repayment options including amortized, level principal, monthly payments, quarterly payments, etc are required by the User, the Individually Scheduled Item Input option should be used.
The Maximum Senior and Subordinated Debt EBITDA Multiple refers to a maximum multiple of total Senior Secured Debt and Sub Debt divided by the Company's EBITDA. This often is a guide that Sub Debt Lenders use to measure their comfort for the upper limit of the Company's debt capacity.
The Max EBITDA Senior and Sub Debt Multiple Input is found on the Transaction Sheet Sub Debt Input page. It is a goal number for informational purposes and does not effect any calculations. The actual multiple for the Transaction Sheet Sub Debt will be reported on the Transaction Page for reference purposes.
Origination Points as used in the ThruThink® analysis are fees charged by the lender for multi year loans at the time of origination of the loan. Fees are often expressed as Points and one Point equals 1% of the loan. If there is a straight dollar amount for a fee, include this fee as an a Transaction Expense and Due Diligence Fees under the Step 7 Inputs.
In the ThruThink® analysis, Origination Points are amortized and added to the Amortized Assets on the Balance Sheet along with the Transaction and Due Diligence Expenses and amortized over the Years for Goodwill and Transaction Expenses in the Tax Rate and Depreciation Input page. This means that Origination Points are not expensed in the year paid, but expensed over the life of the Amortized Asset as Amortization Expense.
If this is a fee to be charged annually, it should not be included as Origination Points, but included as an Operating expense for Year 1 and thereafter if applicable.
Origination Points are only an option for the individual Transaction Sheet Loans. The Individually Scheduled Debt Items do not have the option to specify Origination Points. An AJE may be made to Amortized Assets for this purpose however.
Other Current Debt is considered short term due to be paid within 12 months and can be reported with two methods. A general category can be reported for the Transaction Sheet and the Existing Company and more specific information may be entered with the Individually Scheduled Other Current Debt input process.
The General Other Current Debt input on the Transaction Sheet and the Existing Company Debt input page is for general miscellaneous debts due with 12 months. The Transaction Sheet portion and the Existing Company portion are grouped together with one interest rate feature. For items with multiple interest rate requirements, the User should use the Individual Scheduled Other Current Debt item inputs, as described below.
Other Current Debt - General Amounts
The general debt portion comes from inputs in Step 6 for the Transaction Sheet and/or the Existing Company. The Individually Scheduled amounts come from a series of individual loans identified in the Individually Scheduled Debt Input page also available in Step 6 for both the Transaction Sheet or the Existing Company.
The initial General Other Current Debt from the Transaction Sheet and the Existing Company will be combined together after the Effective Date. If the Credit Limit input for Other Current Debt in Step 6 is left blank, the General Other Current Debt will stay constant through Year 1 and be paid off in Month 12 of Year 1.
For each year off the Horizon, the Credit Limit input may be adjusted on the Other Current Debt page (see Info Browser). When the General Credit Limit input is greater than '0', the General Other Current Debt amount will roll into a Credit Line facility with weekly automatic draws and payments to the cash account.
Other Current Debt - Credit Line
The Credit Line feature of ThruThink® may be turned on by entering a Credit Limit amount In Step 6 which will apply to the portion of the beginning Other Current Debt entered that is not a part of the Individually Scheduled Other Current Debt.
The initial Credit Limit amount will carry forward to all successive years unless changed by the User with an annual Credit Limit input for each year on the Other Current Debt page (See Info Browser). Any future annual Credit Limit input will automatically carry forward to all successive years unless changed in future years by the User.
To turn the Credit Line feature off, leave the Credit Limit input blank and the General Other Current Debt portion will be paid off at the end of the then current year. Enter a '0' and the amount will be paid off at the end of Month 1 of the then current year.
If the Credit Limit is greater than '0', on a weekly basis, there will be automatic draws to the Other Current Debt throughout years 1-3 up to the amount of the Credit Limit to cover shortages in the cash general account. If there is a surplus in the cash general account, if the Credit Limit is greater than '0', there will be automatic payments to the Other Current Debt Credit Line up to the amount of the outstanding balance of the Credit Line. This is similar to the sweep feature for a credit line with a bank. When the Credit Line is blank or set to '0', no automatic draws or payments will occur.
Interest is paid monthly for the General Other Credit/Credit Line amounts.
Overall manual adjustments to the General Other Current Debt category may be made on the Cash Flow Control page. Increases made from the Cash Flow Control page will take place in Month 1 and decreases will take place in Month 12.
The Cash Flow Control (see Browser - Workflow) adjustment for Other Current Debt can be used to increase or decrease the General Other Current Debt portion. Increases from the Cash Flow Control page will be applied 1st to the Credit Line up to the Credit Limit, then to the non-interest bearing portion of the Other Current Debt section (see Information Browser, Other Current Debt Balance).
When the Credit Line is active (a Credit Limit above '0'), the interest is paid monthly, otherwise the interest is paid annually at payoff.
This debt is represented on the Balance Sheet under Current Debt even if renewed every year. It will be considered due within 12 months at all times.
Other Current Debt - Individually Scheduled
The Individually Scheduled Other Debt are individual short term liabilities that are either beginning balances or funded in specific months for each year of the Horizon Period and are paid 12 months later. Each separate debt item may have a different interest rate or none at all.
During Debt Setup, the Individual Scheduled Items can be applied to either the Transaction Sheet or directly to the Existing Company.
The entire category may be renewed (not paid off) each year by selecting 'Yes' for any given year in the Other Current Debt Detail page (see Information Browser). This will extend all of the Individually Scheduled monthly anniversaries for that year for 12 months (see Annual Renewal below).
If the Funding Year input is left blank, it will be paid in Year 1 in the funding month indicated. To fund loans in future years, place a year input for Funding Year and it will funded in that year in the Funding Month indicated and be paid 12 months after the indicated funding month.
If the Funding Month is left blank, it will be funded in month 12 of the year indicated. The entire category may be renewed (not paid off) each year by selecting 'Yes' for any given year in the Other Current Debt Detail page (see Information Browser). This will extend the monthly anniversaries for 12 months.
The month selection will only apply during years 1-3 since the Monthly Cash Flow is only available for those years, however the Funding Year selection will apply for each year of the Horizon period.
The interest is paid annually at each of the liabilities anniversary date.
An overall manual payment adjustment to the category may be made on the Cash Flow Control page or with an Adjusting Journal Entry.
The Cash Flow Control (see Browser - Workflow) adjustment for Other Current Debt can only be used to pay down the Individually Scheduled Debt portion. Increases from the Cash Flow Control page will be applied 1st to the Credit Line up to the Credit Limit, then to the non-interest bearing portion of the Other Current Debt section (see Information Browser, Other Current Debt Balance).
Adjusting Journal Entries may be made to either increase or decrease the Individually Scheduled Debt (see step 7).
Both the Cash Flow Control payments and Adjusting Journal Entries for the Individually Scheduled Other Current Debt will take place in Month 12 of the applicable year.
If this debt is due in a period longer than 12 months from the Effective Date, the User should choose one of the Other Long Term debt categories for this debt. In this manner, the debt will be then considered a Long Term Debt on the Balance Sheet.
Negative Amounts - Changing the 12 Month Anniversary Payoff
Negative amounts for Loans are used to move the 12 Month Anniversary Payoff payment month. This should only be used when the Renewal is set to 'No' for the year involved.
By default, the payoff for each Individually Scheduled Other Current Loan will be paid off (unless renewed) in the next year (Payoff Year), 12 months after the Funding Month.
If the payoff needs to be earlier in the Payoff Year, enter a negative loan amount for the payoff in the month needed and enter the Payoff Year as the Funding Year and enter 'Move' in the Description Field for that amount. Enter another corresponding positive amount in the 12 month anniversary month in the Payoff Year for the original loan amount and also enter 'Move' in the Description Field for that entry as well. This effectively moves the payoff from the original 12 month anniversary month to the new required month in the Payoff Year. This option should only be used when the Renewal is set to 'No' for the year with the negative amounts.
If the payoff needs to be later in the same year as the Funding Year and not in the Succeeding Year, enter a negative loan amount for the payoff in the month needed (must be after the Funding Month of the original loan) for the Funding Year and enter 'Move' in the Description Field for that amount. Enter a positive amount in the 12 month anniversary month of the original loan in the Succeeding Year and also enter 'Move' in the Description Field for that entry as well. This effectively moves the payoff from the original 12 month anniversary month to the new required month in the same year as the Funding Year. This option should only be used when the Renewal is set to 'No' for the year with the negative amounts.
Please note that when entering negative amounts to move the payment month, it is important to enter 'Move' in the Description Field for both the positive as well as the negative adjustment amounts.
Annual Renewal
For the General Other Current Debt portion, the Credit Limit input will guide the annual renewal of the General Other Current Debt. If the Credit Limit input is left blank, the General Other Current Debt will stay constant through Year 1 and be paid off in Month 12 of Year 1.
If the Credit Limit input for the General Other Current portion is entered as '0', the General Current Debt amount will be paid off in Month 1 of Year 1.
If there is an amount greater than ‘0’ for the Credit Limit for any given year, the Credit Line will be renewed and the auto Advance/Pay described above will be active within the parameters of Credit Limit. The annual Credit Limit inputs are found on the Other Current Debt page (see Information Browser - Other Current Debt Balance Detail).
For the Individually Scheduled portion of the Other Current Debt, there is an annual selection on the Other Current Debt page (see Information Browser - Other Current Debt Balance Detail). For each year of the Horizon, by selecting 'Yes', the entire category will be renewed and the loan anniversaries will all be extended by 12 months.
This debt is represented on the Balance Sheet under Current Debt even if renewed every year. It will be considered due within 12 months at all times.
Other Current Debt - Non Interest Bearing Portion
This is miscellaneous other debt due within twelve months that does not accrue interest.
The initial balance will come from the Other Current Debt total imported from other projects when Combine Other Projects feature is used. This feature is not currently available.
Specific Increases or Decreases to this category may be made with an Adjusting Journal Entry (see Step 7) for each year of the Horizon.
Increases to Other Current Debt made on the Cash Flow Control page (see Browser, Workflow) that exceed the Other Current Debt Credit Limit will increase this category. Decreases in the Other Current Debt category from the Cash Flow Control page that exceed the outstanding balances of the General or Individually Scheduled Other will decrease this category.
Caution: An AJE entry to this account after the Effective Date will directly effect cash but will have no effect on income/expenses or tax calculations either cash basis or accrual basis.
Because inputs to this account will effect cash, the User will need to be careful to insure that this is the intended effect. An AJE to another Account with the opposite sign may need to be made to offset this cash effect.
The cash flow impact will be contained in the Non Expense Adjusting Journal Entry cash flow line item in the Cash Flow Control form.
There are three available items for the initial Other Transaction Debt. The User should input the most important item as Loan # 1 and for # 2 and 3 in order of importance. Beyond the regular payments identified for each debt, any adjustments made on the Cash Flow Control page to this category of loans will be applied to the first Loan item and then when paid off, then to the second, etc. Any draws made on the Cash Flow Control page to this category of loans will be applied to the first item only. In this instance, the same payments will be made as identified for each debt, and the remaining balance at the end of the term identified for each debt will be paid off in a balloon payment. A Cash Flow adjustment or AJE that creates a negative loan amount will not be allowed. If a draw or AJE is made for a period after the loan term is expired and the original loan has been paid off, the amount of the Cash Flow adjustment or AJE will create a loan balance until adjusted again with either a Cash Flow Sheet adjustment or another AJE. Interest will be paid on the balance annually until paid off with either another Cash Flow page adjustment or AJE.
If individual activity (Payment or Draw) is needed for each item separately, an AJE may be made to each specific item.
On several of the debt input options in the ThruThink® analysis there is a Payment Beginning Year option. When this occurs, the Payment Beginning Year will indicate when the payments should begin. Interest will accrue from the initial period of the Note, however, cash payments of Interest and or Principal will not begin until the Beginning Year indicated. This is designed for the Seller Base Note, to provide the option of delaying cash being used for the Seller Base Note. Often when a Seller Note is involved, the debt holders in senior position to the Seller Note will not allow cash being used to pay the Seller Note until the Company has demonstrated sufficient performance to pay back debt senior to the Seller Note or until a substantial amount (or all) of the senior debt has been paid.
All of the unpaid Seller Note interest will be an Accrued Interest expense and become an Accrued Interest liability on the Company Balance Sheet.
In the ThruThink®, Payment in Kind (PIK) is an extra annual interest fee charged by a Subordinate Debt lender that is paid at the end of a pre determined period (Payment Beginning Year). It is considered as additional interest, accrued, but unpaid until the Payment Beginning Year. It is in addition to the regular stated interest rate for the loan and, as interest, is the percent indicated (PIK Interest Rate) applied to each years beginning balance of the loan for each year it is in effect (from the initial period of the loan until the Payment Beginning Year).
The PIK payment can be paid in a lump sum or in annual installments (# of Payments) that begin in the Payment Beg Year and continue annually for the # of years indicated for the # of Payments.
The PIK Interest will be an accrued interest expense while accruing, creating an accrued liability and when paid, a reduction of cash, a reduction of the liability and for cash basis taxes will be a cash basis expense in the date it is paid. For accrual basis tax, it is an accrued expense in the year accrued.
The Performance Earn Out Note is how the Earn Out option is paid to the holder of the Earn Out. The Earn Out Note is a debt obligation and is found in Step 6, Transaction Debt Section and is paid in accordance with the debt terms set up by the User for the Performance Earn Out Note in Step 6. The terms of the Earn Out option can be accessed in Step 4 or in the Information Browser by entering "Earn Out".
The Performance Earn Out Options may be used as an incentive for either the Seller or any other individual or entity that a Performance Earn Out might be applicable.
The Performance Earn Out is used as an inducement to the Seller of the Company being purchased, a Lender or an Investor who require a greater upside. Through the Earn Out, a share of the future performance of the Company can be offered. For the Seller, the User may choose that the Performance Earn Out will either be treated as a part of the purchase price of the Company and capitalized in the year being earned as an increase in the amortized asset from the purchase of the Company or it may be expensed in the year of being earned. In both cases, the Earn Out is calculated each year and will accrue as a Performance Earn Out Note in the Transaction Debt Section of Step 6 and be paid in accordance with the debt terms set up by the User for the Performance Earn Out Note in Step 6.
The Performance Earn Out can only apply to one entity at a time. In other words, it can not be set up for the Seller and another for an Investor.
How the Performance Earn Out is calculated can be found on the Performance Earn Out Input page listed under in the Transaction Sheet Debt Inputs in Step 6.
Payments before end of Earn Out Duration period
CAUTION - If the Earn Out Note has a Beginning Payment Year that is less than the end year of the Earn Out Duration period causing a payment to be made prior to a subsequent decrease in the Earn Out Note due to Company performance, a negative loan balance would be created which will be then zeroed out and increase the amortized purchase price for the Company when the Earn Out is part of the Company purchase or will increase the Earn Out expense deduction when the Earn Out is expensed. Once a negative Earn Out Note is created, there is no provision to recover that amount if Company Performance recovers later during the Duration Period. Because of this, the safest method is to begin the Earn Out payments after the end of the Duration Period.
Annual Payments on the Transaction Sheet Real Estate Debt will be the interest on the outstanding balance of the loan at the prior year end plus principal. The amount of the Principal is calculated by dividing 1 by the remaining years of the loan. Example:
10 year Loan:
Year 1 principal repayment will be 1/10 or 10%
Year 2 principal repayment will be 1/9 or 11.1%
Year 3 principal repayment will be 1/8 or 12.5%
There is a provision in the Cash Flow Control that allows the User to be able to increase the loan (or additional payments) during the life of the original life of the loan. When an advance on the loan is made after the original loan is made, the loan duration is reset to the original term. Because of this the principal repayment calculation floats with the remaining years of the loan.
The provision of additional advances and payments is reflective of a Line of Credit situation that provides the ability to make additional advances and paybacks. It also allows the User the flexibility and cash flow insight to adjust the loan amounts as Cash Flow indicates and test different scenarios in future years.
In all cases, if a Balloon Year is indicated by the User, the remaining balance of the loan is paid off in the Balloon Year. This will include advances that may have been made only the year before.
If other principal repayment options including amortized, level principal, monthly payments, quarterly payments, etc are required by the User, the Individually Scheduled Item Input option should be used.
The Restructure Process is only used with the Existing Company and allows the User to represent an item on the original Existing Company Balance Sheet and then "restructure" the item on the balance sheet before the Effective Date. It is intended that this be matched by a corresponding Adjustment addition to the Balance Sheet using one of the Individually Scheduled Debt or Asset Item Inputs making the "Existing Company-Adjustment" Show On selection for that item which will then cause the Adjustment addition to show up in the "Adjustment Column" on the Existing Company Balance Sheet. This will take place before the Effective Date or before closing of escrow. This is simply to show a "detail trail" for pre Effective Date adjustments or restructures. The Adjusted Balances are the only ones subsequently used in the analysis.
The primary function for this process is intended to illustrate a "Restructure Plan" of Short Term Debt, i.e. A/R, Inventory or Other Current Debt to Long Term Debt in order to increase Working Capital.
If a corresponding adjustment to another debt category is not made, there will be an equity imbalance for which an Equity Adjustment will need to be made. Adjustments to Equity are not recommended and must be made carefully.
The Seller Debt is a provision for the Seller to take back a portion of the purchase price of the Company as a Note Payable. This is a commonly used option for financing a portion of a Company Acquisition. There are a number of provisions involving the Seller Note.
First there is a Base Note broken down into the (1) Current Pay Portion and (2) Non Current Pay Portion and in order to provide the Seller incentive to take back a Note, the (3) Performance Earn Out Note is available to the Seller.
The Current Pay portion of the Seller Base Note will calculate automatic payments (either amortized or interest only) as indicated. With Non Current Pay, there will be no automatic interest or principal payments calculated. The Non Current Pay Note will accrue interest at the selected rate and the Principal and Interest can be paid off with manual excess cash payments in the Cash Flow Control page.
The purpose of separating the Seller Note into Current Pay and Non Current Pay is to satisfy possible Senior or Sub Debt lender conditions that the Seller not be paid ahead of the Senior or Sub Debt. If this applies, the Seller Debt can be made Non Current Pay and paid from the Cash Flow Control page when extra cash and lender criteria permit.
Excess Payments from Cash Flow Control
Excess Cash Pay down will be 1st applied to outstanding interest on the Non-Current Pay Seller Note, then principal on the Non Current Pay Seller Note, then to the outstanding interest of the Performance Earn Out Note, then, if the Performance Earn Out note is not amortized, the principal of the Performance Earn Out Note, then to interest of the Current Pay Seller Note, then to the principal of the Current Pay Seller Note. A negative number can be inserted to signify an increase in the note which will also be an increase to cash. An increase in the note will be applied to the Non Current Pay Seller Note.
Seller Notes-Adjusting Journal Entry Process
AJE to Interest
AJE entries to Seller Interest Expense will be applied to the Current Pay Seller Note Interest. AJE entries to the Seller Debt Accrued Interest be applied first to the Non Current Pay Seller Note accrued interest and then to the Current Pay Accrued Interest. An AJE can not be made to the Accrued Interest for the Earn Out Seller Note.
AJE to Principal
Because the Non Current Pay Note does not have automatic payments, AJE entries to the Seller Debt Principal amount will be 1st applied to Non Current Pay Seller Note. If there is no balance on the Non Current Pay Seller Note the AJE will be applied to the Current Pay Seller Note, then to the Earn Out Seller Note.
Senior Debt means that the debt is secured by a first priority lien on the assets that secure the debt. The assets that secure an individual loan is referred to as the Loan Collateral. The debt generally is a percentage of the value of the Collateral (Loan to Value Ratio) in order to allow a recovery margin in the case the lender must recover the Collateral to pay off the loan. In addition, generally there is an amount of the Collateral that is deemed by the lender as ineligible (Ineligible/Reserve Percentage). This means that the lender does not count the Ineligible Reserve amount as collateral for the loan. The Ineligible/Reserve percentage is generally used in assets such as Accounts Receivable and or Inventory and would represent issues like receivables over 60 days old (possibly uncollectable) or old, spoiled or obsolete inventory. There is an Ineligible provision for the other debt categories which can be used by the user to plan for possible value differences with the lender or any reason to reduce the asset value for lending purposes. Of course this can be left empty and the Loan to Value Ratio reduced to accomplish the same thing.
The Secondary Debt of Other Debt, Subordinated Debt and Seller Debt may have no specific security for the loan other than the general obligation of the Company and any guarantors of the Debt. Each of these types of loans have specific and very individual purposes and each have different repayment avenues and justifications. Generally all assets of the Company after payment of the Senior Debt becomes Collateral for the Secondary Debt depending on the Terms of each of the Secondary Debts.
Subordinated Debt (Sub Debt) is a type of Secondary Debt that is subordinate to Senior secured debt and may be subordinate to Other Debt depending on the terms of the Sub Debt. The collateral for the Sub Debt is the value of the Company usually prior to any payment of Seller Debt and Equity Debt and prior to the Equity holders. There is more risk associated with Sub Debt and accordingly the Terms of the Sub Debt are usually more complicated.
The ThruThink® analysis has provisions for Payment in Kind Interest and Warrants which provide the Sub Debt Lender the opportunity to be compensated for the higher risk.
Cash Flow Control Payments
Additional payments to Subordinated Debt may be made on the Cash Flow Control page. These payments are in addition to any regularly scheduled payments on the Sub Debt as inputted by the User when this debt was setup. This provision is intended to manage cash by applying extra cash flow to pay down debt or if applicable drawing new debt to supplement cash.
A positive number is entered for payments. Payments on the Cash Flow Control page will be 1st applied to the Transaction Sheet Sub Debt outstanding interest then principal then PIK Interest until it is paid off and then allocated to the Specifically Scheduled Sub Debt items outstanding interest then principal then PIK Interest in the percentage of their outstanding balances.
Enter a negative number for a draw on the Loan. Draws will be made only to the Transaction Sheet Sub Debt. If a draw or AJE is made for a period after the loan term is expired and the original loan has been paid off, the amount of the Cash Flow Control payment or AJE will create a loan balance until adjusted again with either a Cash Flow Control adjustment or another AJE. Interest will be paid on the balance annually until paid off with either another Cash Flow Control adjustment or AJE.
Additional Payments will be applied first to Sub Debt regular interest, then to Sub Debt principal then to Sub Debt PIK Interest. Additional Payments to the Sub Debt will not reduce Warrants.
Transaction Sheet Subordinated Debt Repayment
The repayment for the Transaction Sheet Sub Debt can be interest only with annual interest payments made during the loan and the entire principal amount due in the last year of the loan or amortize the loan with level annual principal and interest payments through the life of the loan so as the loan is paid off with the last annual payment in the last year of the loan.
If Interest Only , "Yes" is selected on the Transaction Sheet Sub Debt Input page, the loan will be interest only, if "No" is selected the loan will be amortized.
If other repayment terms are required, the User may use the Individually Scheduled Item Input process to enter Sub Debt with other repayment options.
Individually Scheduled Subordinated Debt Repayment
On the Individually Scheduled Item Input page, there is a section for Subordinated Debt that allows the User to enter up to six individual separate Sub Debts each with four separate repayment options, Interest Only, Amortized Level Payment, Level Principal plus Interest.
Subordinate Debt Prepayment Penalty
Because Subordinate Debt is subordinate to Senior Debt, it often is at a higher interest rate than the Senior Debt.
If the Company has excess cash, it may choose to pay down the higher interest rate debt prior to the end of the debt term. The term of the Subordinate Debt is often integral in providing a certain desired rate of return on the investment for the debt holder. Because of this there often will be a prepayment penalty for any early pay down of the Subordinate Debt.
The Prepayment % penalty will apply to the prepayment of the principal portion of all Subordinate Debt in the Transaction Sheet, Existing Company and the Individually Scheduled Subordinate Debt which includes all the Subordinate Debt in this analysis. The penalty will reduce cash and be an expense in the year of payment.
The Subordinate Prepayment % is an input on the Subordinate Prepayment Penalty Input page.
Warrants, as used in the ThruThink® analysis, are rights given to an outside party (Warrant Holder) enabling them to own a certain percentage of the Company at some point (at the Warrant Holders election) in the future. Although in reality, warrants can be sold by the company, in this analysis, the Warrants are issued by the Company to the Warrant Holder at no cost to the Warrant Holder.
Warrant Liability is generated from the Warrant provisions of the Subordinated Debt for the Transaction Sheet Subordinated Debt (Individual Loan) or the Individually Scheduled Subordinated Debt (Multiple Loans) that is directed to either the Transaction Sheet or the Existing Company .
Warrants are very often given to a Subordinated Debt lender (Sub Debt) as an inducement to make the loan. The security for the Sub Debt loan is the value of the company after the Senior Secured Debt (Senior Debt) is paid, which involves a greater level of risk. As partial compensation for the added risk, Warrants provide the Sub Debt lender the ability to participate in the future success of the company. In this analysis, the Warrant Holder is the Sub Debt lender.
Warrant Value Calculation
The Warrant calculation in this analysis creates a liability (Accrued Warrant Value) for the indicated percent of the Company issued as a Warrant (% of Company Value) at the end of each year, based on the selected multiple of EBITDA (EBITDA Sale Multiple). The Warrant Value is calculated by the % of Company Value times the Company Value (EBITDA Sale Multiple times the Company's EBITDA, plus cash less all liabilities except accrued warrant value). The Warrant Value in the analysis will be based on the EBITDA of the year prior to the Warrant Exercise Year and the Balance Sheet of the Company as of year end just prior to the Warrant Exercise Year.
The details of the Warrant calculations along with the Company Value assumptions can be found in the Sub Debt Warrant Detail page. There are separate calculations for the Transaction Sheet Sub Debt and the Individually Scheduled Sub Debt.
Warrant Exercise Year
The Warrant Exercise Year is the year that the Warrants are to be paid to the Warrant Holder. It is a User Input in Sub Debt setup input page. The Warrant Exercise Year is intended to reflect when the Warrant Holder will exercise the Warrant although this may not be known by the User at the time of the Debt setup. This Input then becomes a best guess, estimate or forecast by the User. In the analysis the Warrants are then purchased from the Warrant Holder (Sub Debt Lender) by the Company in the Exercise Year. As the Warrant is paid, the Accrued Warrant Value liability is reduced and company cash is reduced.
For the Transaction Sheet Sub Debt Input, the resulting Warrant amount can be paid in a lump sum or in annual installments ( # of Payments) to be negotiated at the time the Warrants are issued by the Company. This is intended as a tool for the Company to spread out the impact of paying the Warrant upon exercise. This is a User Input at the time the Warrant is set up by the User. This is not available to the Individually Scheduled Sub Debt Inputs as these are generally existing Warrants established prior to the Effective Date.
As the Warrant Value is established or changes, in addition to adjusting the Liability, Accrued Warrant Value, a corresponding offset entry will adjust the Equity Section of the Balance Sheet.
In addition to the Warrant Exercise Year, the Warrant Sale Multiple of Company EBITDA may also have to be a best guess and should be considered simply a place holder representing the estimated future impact of the Warrant.
There are no tax consequences calculated for any gain or loss on the issuance or buy back of the Warrants.
The purpose of including Warrants in the analysis is to provide an estimate of the cash flow requirement on the Company at the time of the Warrant Exercise Year.
Because in this analysis, the Warrants are issued at no cost to the Warrant Holder, the Company must be careful as to the amount of equity being given to the Warrant Holder. It should be balanced between the amount of initial equity and the Warrant Holders risk position. The analysis can be used by the Company to measure the possible future value of the Warrants and better analyze this balance as well as forecast the future cash availability to fund the Warrant buy back.
This analysis can also be used by the Sub Debt Lender. The analysis will provide an Internal Rate of Return for the Sub Debt lender for each year, given annual value assumptions, which includes the value calculations described above for the Warrant. This may assist the Sub Debt lender to test for the best time to exercise the Warrant.
Unhappy with cash flow
Cash flow is obviously a function of sales less expenses less debt payments, taxes and other cash withdrawals. All of those factors are represented in this analysis and should be individually reviewed, studied and adjusted where possible (except for income taxes which only adjust from changes in taxable income).
Future sales and expenses should reflect available historical performance information and fit into a plan and strategy for the future. Adjustments can be made to sales and expenses, however they should always be made in context with the strategy for the future. Be careful with "wishful thinking" and arbitrary adjustments simply to show better profitability and cash flow.
It sometimes is useful to adjust sales simply to see what level of sales is required to meet cash flow performance goals. This will often expose an unacceptable business opportunity as sales may need to be unrealistically high.
The debt structure itself should be reviewed. Debt can be adjusted by increasing the debt amount or extending the payments by making the debt interest only, or extending the repayment terms of the principal amount of the loan can all have the effect of easing the impact on cash (temporarily in the short term).
In case of a cash shortage, each loan shown on the Cash Flow Control should be analyzed and adjusted where appropriate and new loans created where appropriate.
Capital expenditures should be reviewed and if cash is short, critique the need for non financed capital expenditure or where possible, financing could be used to conserve cash.
If cash is short, any non expense cash withdrawals need to be reviewed and reassessed.
If the above factors have been reviewed thoroughly and there remains an unacceptable cash position or cash shortage, the business opportunity should be reviewed for viability. If the viability of the business opportunity remains because for example, the cash shortage is temporary, the equity structure can be studied for the option of increasing the beginning amount of cash or lay the groundwork for additional equity cash contributions in the future.
Understanding the above factors beforehand will provide the opportunity to design loan terms or equity contributions from the beginning which provides an immeasurable advantage over restructuring loans or equity structure after the need arises. Often the latter is impossible and can be the difference between success and failure for a business venture.
Accounts Receivable Average Days to Collect
How long it takes to collect Accounts Receivable will have a direct and often material impact on cash flow. Lowering the average time to collect Accounts Receivable will improve cash flow. The Average Weeks to Collect Accounts Receivable can be adjusted by the User with the Average Weeks to Collect Input page.
Inventory Average Days to Hold
How long Inventory is held before it is sold (Inventory Turn) will have a direct and often material impact on cash flow. Lowering the average time Inventory is held will improve cash flow. The Average Weeks to Hold Inventory can be adjusted by the User with the Average Weeks to Hold Input page.
Accounts Payable Aging
Accounts Payable payment frequency will effect cash flow on a weekly, monthly or seasonal basis. The frequency for paying Accounts Payable may be adjusted in the Accounts Payables Set Up form.
Individually Scheduled Items
The Individually Scheduled Items of A/R, Inventory Creation and Use, Cost of Goods Sold, Other Expenses, and Income will effect cash flow on a weekly, monthly or seasonal basis. These Items will allow input by month to adjust cash flow more specifically within the year. This is available in years 1-3.
Are the Owners contributions to the actual day to day operations of the Company adequately included in the expense or EBITDA inputs in Step 3?
Does the projected EBITDA going forward properly reflect the Owners contribution of time and talent to the day to day operations of the Company?
In evaluating the Company performance, often the owner will make significant contributions of time and talent to the operation of the Company that are either Un-Compensated or excluded from expenses for evaluation purposes. If the Owner's contribution of time and talent is critical to the operation of the Company and without such, the Company's existing and expected EBITDA can not be achieved, the value of the Owner's contribution of time and talent should reflected in the Company's expenses and EBITDA projections.
In a purchase or valuation of the Company, the value of this contribution should be reflected as an expense in order to properly asses the value of the actual company. Otherwise especially with a smaller Company, the results of the Company performance could be construed as simply creating a "job" or life style for the owner which may reflect limited independent company value to an independent party.
In addition, it is also important to reflect the Owners expectations as to Owner Compensation. In smaller companies, the Owner's compensation can have a significant impact on the performance of the Company. The User should make a realistic estimate of the compensation necessary or required for the Owner. This should not be viewed as a return for the Owners Equity contribution, but as compensation for operational contributions.
The Owners requirement for living expenses or cash withdrawals should also be considered and amounts required over the actual operational contributions of the Owner can be made with non expense cash withdrawals in the Non Expense Cash Flow page.
If the User chooses to not withdraw cash from the Company, an expense for the Owners Contribution can be made and then a cash contribution in the Non Expense Cash Flow page for the same amount can be made. In this manner, the expense is reflected in the EBITDA calculations, but the cash is contributed back for cash flow purposes.
Owner compensation Payments
Owner compensation should be considered in two parts. That amount to compensate the Owners contributions to the operations of the Company that is essential and/or would need to be replaced without the Owner so providing. The second part would be that amount provided to the Ownership that is not intended to be an expense of the Company.
Proper treatment of Owners Compensation can have an important impact on the indication of Company performance as reflected in the Company EBITDA. It is important that the appropriate amount for Owners Compensation be included as an Operating expense, however it is also equally important that any excess amount not representing actual operational contribution be excluded from Operational expenses.
There are several ways to reflect Owner Compensation.
1. Input as Other Expense.
An entry in this category is an expense and will be deducted prior to and reflect in a lower EBITDA. It will be included as an Adjustment to Operating/Overhead Expense in the Cash Flow Control. Amounts should include any applicable payroll taxes and can also include other employee benefits such as health insurance, pension expense, etc. Please note that if the User has or will enter EBITDA override inputs either in Step 3 or the Cash Flow Control, any adjustments to expenses such as this Owners Compensation, will be overridden by the EBITDA inputs (see Step 3). In that case, the EBITDA override numbers used should reflect the proper Owners Compensation.
2. Input as Non Expense Draw
An entry in this category is not an expense and will be deducted as a non expense cash flow item after and not effect EBITDA. It will be included as a non expense cash flow draw.
Inputs for the first two methods are made in Step 7 or directly with the Owner Compensation Input form.
3. Include as part of general Operating Expenses
Owner Compensation can simply be considered as part of the general Operating Expense category and in this regard, nothing separate needs to be done by the User. Care must be taken however to insure that Owner Compensation is in fact included in the expenses.
This is the value of the Un-Compensated Owner Time and Talent Contributions in the Step 3 Base level EBITDA.
Un-Compensated Owner Contribution is defined as that time and talent contribution that is not being paid to the Owner which is critical to the operation of the Company without such, the Company's existing EBITDA as represented in the Step 3 input can not be achieved. The value of such Un-Compensated Owner value should be that which would be required to replace such contribution from an outside party.
This should be only that Un-Compensated Owner contribution to operations that would need to be replaced if the Owner were not there. This reflects that the Base level EBITDA as entered in Step 3 as the Current EBITDA at the time of the Effective Date or Closing, does not contain sufficient expense to properly compensate for the operational time and talent contributions of the Owner. This input will be used as a factor in the Evaluation and Deal Score but it will not change the current EBITDA or add expense to the projected EBITDA. To change the current EBITDA, go to Step 3, to adjust the projected EBITDA, the User should either reflect that expense in the EBITDA number itself or add the Owner Compensation to the projections using See Step 7.
If the owner of the Company is making significant Un-Compensated time and talent contributions to the operation of the Company the value of this contribution should be considered in order to properly asses the real value of the actual Company or Deal. Often the value of this contribution is excluded as "Owner Benefits", however without this adjustment. very often the EBITDA value of the Company or Deal simply reflects providing the Owner a "job".
Un-Compensated Owner Contribution Inputs
ThruThink Evaluation® Input
This input is entered through the ThruThink Evaluation® Additional Information page or in the Quick Deal Input page and only reflects the Un-Compensated Owner Contributions that are not reflected in the current level of EBITDA as entered in Step 3. This is intended to reflect the current situation as represented with the current level of EBITDA as entered in Step 3.
The amount entered for Un-Compensated Owner Contributions for the ThruThink Evaluation® will not add expense or effect the cash flow projections but be used as a factor in the ThruThink Evaluation®. A significant amount of Un-Compensated Owner contribution to the strategic operation of the Company will have a negative impact on the Evaluation and Deal Score. This input should be as realistic assessment as possible as it is an important component for proper Deal evaluation.
This input should not considered as the return on the Owners equity which should be reflected in Step 8.
In addition to the above, for proper evaluation of the Company's past performance and future performance as compared with the current level of EBITDA as entered in Step 3, the Historical EBITDA and projected EBITDA should also reflect any applicable Un-Compensated Owner Contribution.
Historical EBITDA Input
This input is entered on the Un-Compensated Owner Contribution Input page and applies if the Historical Analysis does not reflect the value of the Owner's contribution to the Operations of the Company, an amount can be automatically added as an implied expense to the Historical Analysis in order to make the EBITDA comparison and Company Value indication more accurate.
Projected EBITDA Input
This input is entered on either the ThruThink Evaluation® Additional Information page or with the Un-Compensated Owner Contribution Input page and applies only if the Projected EBITDA does not reflect the value of the Owner's contribution to the Operations of the Company. This is for the purposes of the ThruThink Evaluation® calculations only and will only add an implied expense to the projected EBITDA for the Evaluation calculations and will not add expense or a cash flow adjustment to the actual projected EBITDA. Actual expense or cash flow adjustments for Owner Compensation can be made using the Step 7 Inputs or the Owner Compensation Input page directly.
The Earn Out option can be accessed in Step 4 or in the Information Browser by entering "Earn Out".
The Performance Earn Out Options may be used as an incentive for either the Seller or any other individual or entity that a Performance Earn Out might be applicable.
As an inducement to an Investor that requires a greater upside the Investor can be given a share of the future performance of the Company. If the Company performance does increase, the Investor will receive a debt obligation or note payable from the Company in the amount of the Earn Out (to be paid in accordance with the terms of the note payable). If the Company performance does not increase, there will be a smaller or no Earn Out at all.
As an inducement to the Seller or if the Seller requires a greater sale price than the current performance of the company might allow, a trade off in the Sale Price negotiation may be to give the Seller a share of the future performance of the Company. If the Company performance does increase, the Sale Price will effectively be increased by the amount of the Earn Out (to be paid in accordance with the terms of the note payable). If the Company performance does not increase, there will be a smaller or no Earn Out at all.
Performance Earn Out Note
The Earn Out is calculated each year and will accrue as a Performance Earn Out Note under the Seller Debt liability section and be paid in accordance with the debt terms set up by the User for the Performance Earn Out Note in the Transaction Debt section of Step 6.
The Performance Earn Out may also be used as an inducement to a Lender or an Investor. To use this option, the User chooses that the Performance Earn Out will not be a part of the Purchase Price and the Earn Out will simply accrue and be paid as the Performance Earn Out Note.
The Performance Earn Out can only apply to one entity at a time. In other words, it can not be set up for the Seller and another for an Investor.
Performance Earn Out Calculation Criteria
How the Performance Earn Out is calculated can be found on the Performance Earn Out Input page listed under the Seller Debt Section of the Transaction Sheet Debt Inputs in Step 6 or under the Information browser under Performance Earn Out Inputs.
There are two Methods for determining a Performance Earn Out: Method 1 - Future EBITDA Performance Method, or Method 2 - % of Gross Sales Over Hurdle Method.
Method 1 - Future EBITDA Performance
The Future EBITDA Performance Method has two Options: Both Options will retroactively effectively increase the Purchase Price of the Company if the Purchase Price application is chosen. When the Purchase Price application is chosen, Option 1 will increase the initial EBITDA Multiple used to purchase the Company per increment of EBITDA growth over the EBITDA Base during the Duration years. An annual decrease in EBITDA will lower the Earn Out Amount. Option 2 will increase the original Purchase Price of the Company by an amount per increment of annual EBITDA result over the Base EBITDA during the Duration years.
Only one Method can be used at a time and with the EBITDA performance method, only one Option can be used at a time.
The Earn Out amount will be calculated based on the specific inputs entered for each Method. For both Methods a duration in years from the Beginning Date is entered by the User for the Earn Out calculations to be applicable (Duration) and if desired a Maximum Earn Out amount. The maximum is not an annual amount, but the maximum cumulative amount over the Duration period.
Method 1, Option 1
For Option 1, an EBITDA Multiple Increase number is entered. This will be a multiple of the EBITDA at the time of acquisition (Base EBITDA). For example, if the initial EBITDA multiple is 5, a multiple increase might be .25. for each $100,000 increase in the EBITDA of the Company for the first 3 Years (Duration) after purchase. Therefore, at the end of the 3 year period, if the Company EBITDA increased a total of $300,000 for the 3 year period, the EBITDA multiple for which the Company purchase was based increases by 1.5, making the final multiple 6.5. The Beginning EBITDA (Base EBITDA) would be multiplied by 1.5 which amount would become the Earn Out Note and paid in accordance with the terms of the Seller Earn Out Note.
The calculation for the EBITDA Earn Out Option 1 will be the EBITDA growth over the Duration Period Input divided by the Increment of EBITDA Growth Input will be multiplied by this EBITDA Multiple and then multiplied by the Initial Company Purchase Base EBITDA.
Method 1, Option 2
For Option 2, after the amount that the Earn Out should increase (Increase in Earn Out Amount) for each increase in EBITDA Increment indicated over the Beginning EBITDA (Base EBITDA).
For example, if the Increase in Earn Out Amount is $300,000 for each $1,000,000 in EBITDA growth over the Duration years, and the Company EBITDA grows by $3,000,000 over that time, the Earn Out amount will be $900,000.
Another application of this method would be the situation of offering the Seller for example, 10% of the EBITDA growth for the 4 years following the Purchase/Sale of the Target Company. The User would then enter $1,000 as the Increase in Earn Out Amount and $10,000 EBITDA Increment Amount and 4 for the Duration Years.
The amounts determined in both Methods become an accrued Performance Earn Out Note Payable and at the end of each year adjusted annually for that years performance. The Earn Out Note amount will increase or decrease each year depending as the Company performance fluctuates. The Earn Out Note will be paid out as indicated by the User in the Terms Input for the Performance Earn Out Note.
The repayment terms of the Performance Earn Out Note are found in the Seller Debt Input section.
Increment of EBITDA Input
This is an amount for Earnings Before Interest, Taxes (Income), Depreciation, Amortization (EBITDA) that should be the Increment for which the Option 1 EBITDA % or the Option 2 Earn Out amount increase indicated above should be applied. For every Increment of EBITDA growth indicated over the Beginning EBITDA indicated on the Sales and EBITDA Input form (Base EBITDA), either the EBITDA increase amount above multiplied by the Base EBITDA amount or the Earn Out amount will be increased by the amount indicated above for each increment of EBITDA growth over the Base EBITDA during the Earn Out Duration Input. The Increment of EBITDA Input is found on the Performance Earn Out Input page
Method 2 - % of Gross Sales Over Hurdle Method.
The Sales Hurdle Earn Out Method provides an opportunity to pay the Performance Earn Out based on a certain percentage of Company Sales over a certain level. The percentage (% Over Sales Hurdle) is a User Input as well as the sales level (Gross Sales Hurdle).
The % indicated for the % over Sales Hurdle will be multiplied by annual Gross Sales that exceed the Gross Sales Hurdle and that result will create the Performance Earn Out amount.
The Earn Out Amount can be tested and observed at different levels of Sales Percent and Sales Hurdle levels to determine the desired level of Earn Out Incentive.
Earn Out Duration Input
A duration period can be entered by the User to indicate how many years the Performance Earn Out will be in place. This Duration Period will begin with the first year after the Beginning Date and represent the number of years that the Earn Out calculations should apply. This input is found on the Performance Earn Out Input page.
Performance Earn Out Cap
The User may enter a maximum lifetime cap on the Performance Earn Out. This will cap the amount calculated by either method of Earn Out calculation. If left blank, there will be no cap. If "0" is entered, the Earn Out will be capped at 0. This input is found on the Performance Earn Out Input page.
Earn Out Duration Period Input
The User may insert the # of Years for the duration of the Earn Out for either Method of Earn Out. This Duration Period will begin with the first year after the Beginning Date and represent the number of years that the Earn Out calculations should apply.
Performance Earn Out Expense
The Performance Earn Out is a factor of Company performance. When the Earn Out is set up by the User, it can either be capitalized or expensed.
Is the Earn Out amount to be considered part of the purchase price for the Company or is it compensation for promised future performance by the Seller such as continued contribution or involvement with the future Company operation?
If it is considered part of the purchase price for the company, the Earn Out amount will be capitalized and accrue to the Performance Earn Out Note and increase the Goodwill asset and be amortized (expensed) over the Goodwill amortization period (default is 15 years).
If it is considered compensation or sharing of the benefit, the amount earned by the Earn Out holder will accrue to the Performance Earn Out Note, but will be expensed in the P & L in the year earned.
When the User elects to expense the Earn Out amount, when the Earn Out changes, the change will be reflected on the Income Statement as Other Expense in the year earned and will be included in the Accrual EBITDA on the Income Statement and be set up as a Performance Earn Out Note Liability. On the Cash Flow Control page, the Earn Out payment is not reflected in the year it is earned, but in the year it is paid out. Payments on the Performance Earn Out are listed under the Seller Debt section on the Cash Flow Control page which is after the EBITDA Calculations. Since the Accrued (earned) Earn Out expense is included in the EBITDA calculations on the Income Statement and the Cash Flow Control EBITDA calculations do not include the Earn Out calculations, the EBITDA on the Income Statement and the EBITDA on the Cash Flow Control page will not match for this reason.
Unless "Yes" is entered as the User Input, the default will be to treat the Performance as part of a Purchase Incentive for the Seller and it will be capitalized to Goodwill and amortized over the life selected by the User. This input is available in the Performance Earn Out Set Up page.
When the Performance Earn Out is paid to one of the Equity Owners of the Company, in determining after tax returns for the Equity Owner in the ThruThink® analysis, the payments to the Equity Owner by the Company for the Performance Earn Out will be taxed as Ordinary Income to the Equity Owner.
During the first year of the Projection Time Horizon, the User may compare the Projections to actual results for either This Year or Last Year.
Actuals may be entered for each month of Last Year and This Year for comparison purposes. The User should enter each month for Last Year and the applicable months for This Year by using the Month ID for Actual Inputs on the Projection to Actuals page.
The Month ID for the Actual inputs is independent of the Month ID for Comparison. Actuals are entered into the appropriate period using the Month ID for Actuals. A comparison between the Projections and either Last Year or This Year can be made, however, when a comparison is made for either the Month or Year to Date, the Month ID for Comparison and the Month ID for Actuals must be for the same period.
A spread of the months activity for the annual Projections for Year 1, Last Year Actuals, This Year Actuals and the Actual to Date and Projections for the balance of the Year can be viewed and printed from their respective tabs on the Projection to Actual page.
Working Capital is defined as the difference between Assets that will be collected in cash over the next 12 months and Liabilities or debts that will need to be paid in the next 12 months. This should include the Current Portion of Long Term Debt which is the portion of the long term debt that will be due in payments over the next 12 months.
The Working Capital Projection to Actual Comparison provides a general picture of what caused Working Capital to change from the beginning of the year to the period entered on the Projection to Actual Comparison Page. The comparison calculations incorporate the major factors that will effect the Working Capital.
Caution, be sure that item balances are taken from a full integrated Balance Sheet and Income Statement for comparison purposes. An example of this would be Depreciation which is a non-cash expense contained in the Net Income and should not effect Working Capital. It is therefore important when using Net Income that includes Depreciation to explain the change in Working Capital to also include the change in Long Term Assets during the period from the balance sheet. The Depreciation will have reduced the Asset value, just as if an item were sold. When this change in asset value is shown along with the Net Income, the effect of Depreciation as an expense (debit) will be offset by the reduction in Assets (credit) and the combination will show no change in Working Capital caused by Depreciation.
For simplicity purposes, in the Projection to Actual Comparison, Working Capital analysis section, Depreciation/Amortization is automatically shown as an add back to Net Income. Therefore to be consistent as explained above, the actual amount for the Assets should be the Gross amount without the reduction for Accumulated Depreciation/Amortization.
This same process will take place for other non cash items such as Gain or Loss from Sale of Assets, change in deferred taxes, etc. as long as the Net Income is shown together with the change in Long Term Assets and Long Term Liabilities.
This is a percentage ratio that uses Adjusted EBIT which is the Company EBIT plus uncompensated Owner contribution divided by the Total Assets of the Company. The Initial value for Total Assets is after or net of depreciation.
For the Initial Value measure, the Initial EBIT is derived from the initial EBITDA as entered by the User less the Year 1 Depreciation and Amortization. This is simply to put the Initial EBITDA input on the same basis as the Horizon Years EBIT for comparison purposes only.
The Annual Budget Feature is a summary of the Individual Scheduled Income and Expense Inputs from Step 3, a summary of the cash flow by month, a summary of the Balance Sheet and some key performance indicators.
The User may select Year 1, 2 or 3 to produce a separate Annual Budget for each of those years.
EBIT stands for Earnings before Interest and Taxes and is derived using EBITDA and subtracting annual depreciation and amortization.
In ThruThink®, EBIT is only used as a part of the EBIT/Total Assets measure. For that measure, since Total Assets have been reduced by accumulated depreciation/amortization, using EBITDA which is before the Depreciation/Amortization expense deduction is inconsistent, therefore EBIT is more appropriate.
The Hard Asset Liquidation IRR is an Internal Rate of Return calculation of the investment in the Company with the return being the annual Company Net Income as if paid out each year and at the Year indicated, the net of the Balance Sheet assets at Book Value without the non cash assets of Goodwill and Amortization of Acquisition Costs after subtracting an amount for all retained earnings (they were assumed to be previously paid out) and all of the Company's liabilities (Hard Asset Value).
This measures the return from the actual operating performance of the Company without adding any benefit from a Gain on Sale. By not including a Market Value Gain on Sale this concentrates the performance analysis on strictly the operating profitability of the Company and not the future value of an Exit Sale. If the operating performance of the Company is acceptable, the Market Value Gain will follow accordingly.
When the Initial Equity is zero or negative, the IRR result will be zero.
The Historical Worksheet is a tool for the User to input historical performance in the same format that is requested by the ThruThink® analysis and assist the User in making sound projections based on historical performance.
The Historical Worksheet is a stand alone analysis for the convenience of the User and will not affect the calculations in the ThruThink® analysis.
There are several calculation results identified with a box outline that show an example of a result that is requested in the ThruThink® analysis in the Sales/EBITDA Input page and the Accounts Payable Future Terms Set-Up page. Numbers identified on the Historical Worksheet may be helpful to guide inputs requested in those forms.
Use Worksheet Projections for Cash Flow Control
Even though the Historical Worksheet is a stand alone tool, the User may choose to use the Worksheet projections for the projections in the Cash Flow Control page which are the projections used in the ThruThink® analysis.
There is an input option that is available on the lower portion of the Historical Worksheet Input page that will incorporate the Worksheet projections into the ThruThink® analysis.
The Company sales total will be adjusted in the Sales Override Inputs on the Cash Flow Control page.
Company COGS % of Sales will be adjusted in the COGS Percent of Sales Override Inputs on the Cash Flow Control page.
The Company Operating Expense projections total will entered into the Cash Flow Operating Expense Input page which will show up on the Cash Flow Control page under Adjustments to Operating Expense.
An adjustment will be made in the Scheduled Income/Expense page to zero out the effect of any inputs on those pages.
Please Note-These projection adjustments will replace any manual override inputs made by the User in the Cash Flow Control to Sales Override and the COGS Percent of Sales Override. These original override inputs by the User will be lost. Pressing the Clear button, will not restore the manual User inputs for these items. This will effect only the manual User inputs for those items on the Cash Flow Control but will not effect any Step 3 User inputs.
The ThruThink® analysis illustrates the projected performance of a business in concert with its debt and equity structure.
Before beginning the Input Process (Step Process), if there are historical operating results for the Company available, this information should be entered into the Historical Worksheet in the ThruThink® analysis. If this is done prior to the input process, it will be helpful to the User in making some of the input decisions and lay out a basis of comparison in a similar format as the ThruThink® analysis.
The ThruThink Evaluation® is for the "business deal" and uses information from the Historical Worksheet. The Evaluation and Deal Score will not be complete unless the historical information is provided.
Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) measures the rate of return of an initial investment against all associated cash flow back from the investment or additional cash invested in the investment. It actually calculates the discount rate for which the Net Present Value of the stream of cash is zero. It is used in the ThruThink® analysis as a comparison tool between different options rather than an inherent stand alone rate of return.
With the IRR, the cash return is reinvested either in the investment or another investment with equal return. Any negative annual cash shortages in the investment will be assumed additional contributions or borrowing which will carry a finance rate the same as the rate of return on the investment. Study the IRR Illustration Example to see how a simple return is reflected in an IRR rate.
Please note that because the IRR calculation does not reflect total negative returns well, when the total $ return is negative (the investment less all returns is less than zero) or the Initial Investment is "0" or negative (surplus cash from acquisition escrow), the IRR calculation will default to "0".
Modified Internal Rate of Return (MIRR)
A Modified Internal Rate of Return (MIRR) is also a measure of the return on a given investment, however earnings are not reinvested at the rate of return for the investment (IRR rate), but at another rate, called a Re-investment Rate, which can be different than the IRR rate. Negative cash flows from the investment will be charged a Finance Rate that can also be different than the IRR rate.
When considering Company Performance, the IRR is used as the earnings are assumed to stay in the company and contribute to company performance. Therefore with the IRR, earnings are reinvested at the same rate as IRR rate and the cost of financing Cash shortages are charged the same rate as the IRR rate. Please note that when the IRR shows "0", the return on the investment is likely negative or the Initial Investment was "0", please see note above.
In the ThruThink® analysis, Partner Equity Returns are measured with the MIRR rate as cash paid out to Partners is not reinvested at the IRR rate, but at the Re-investment Rate. In the analysis, Partner Returns from Equity Note repayments and if the Partner is the Seller, the Seller Note and Earn Out Note payments are used as Partner returns as well as Equity Draws. The final liquidation of the Company is used as the last cash return to the Partners. The final sale or liquidation value of the Company will reflect the cumulative profit/loss of the company as well as any Gain or Loss on the Sale or liquidation.
With the MIRR, the actual dollar amount return over the life of the investment can be less than the initial investment but the MIRR rate can be positive. This happens when the amount calculated for re-investment return provides enough income to bring the sum of the returns plus the calculated re-investment interest income to be greater than the initial investment. In reality however, the re-investment interest returns may not actually take place. For this reason, the default Re-investment Rate is set to"0".
In the ThruThink® analysis, both the Finance Rate and the Re-investment Rate are set to "0" as a default. The User may change these by accessing the MIRR rate page through the Information Browser, MIRR Rates.
Internal Rate of Return Results
On the Internal Rate of Return Summary Report, each year's Internal Rate of Return/Modified Rate of Return Rates is an individual calculation of the Initial Investment as a negative cash outlay at the beginning and each subsequent year activity (cash return for equity owners or net income for Company Performance) as a positive or negative annual return depending on the result). In each year's calculation there is an exit value return assumption based on the Sale/Liquidation value of the Company that given year using the form of liquidation listed (Book Value, Hard Asset Liquidation or Market Value). The liquidation value for each year is entered by the User with the Exit Strategy Input page.
Hard Asset Internal Rate of Return-Company Performance
The Hard Asset Liquidation IRR is an Internal Rate of Return calculation of the investment in the Company with the return being the annual Company Net Income as if paid out each year and at the Year indicated, the net of the Balance Sheet assets at Book Value without the non cash assets of Goodwill and Amortization of Acquisition Costs after subtracting an amount for all retained earnings (they were assumed to be previously paid out) and all of the Company's liabilities (Hard Asset Value).
This measures the return from the actual operating performance of the Company without adding any benefit from a Gain on Sale. By not including a Market Value Gain on Sale concentrates the performance analysis on strictly the operating profitability of the Company and not the future value of an Exit Sale. If the operating performance of the Company is acceptable, the Market Value Gain will follow accordingly.
A useful use of this measure is to establish a bench mark return which can then be used when comparing alternative investments in other companies.
When the Initial Equity is zero or negative, the IRR result will be zero.
The ThruThink Deal Score® is an optional User selection. It is turned off by default and must be turned on by the User in the Workflow menu, Step 7, by clicking the button for ThruThink Evaluation® inputs and choosing "Yes".
The ThruThink Deal Score® provides an "A", "B", "C", "D" or "F" rating of the Deal with "A" being the highest rating. The rating evaluates the Deal or comparative benefit to the Owner as presented by the User Inputs. It is not necessarily a score for the quality of the Company itself. In other words, an excellent Company can receive a poor Deal Score and Evaluation because of improper capital structure, Owner Draws, etc.
The ThruThink Evaluation® is used by the ThruThink Deal Score® however it is not affected by turning the ThruThink Deal Score® on or off.
ThruThink Deal Score® and the ThruThink Evaluation® are registered Service Marks with the United States Patent Office and are services that use proprietary processes of formulas, algorithms and measurements of business performance.
The ThruThink Deal Score® and ThruThink Evaluation® are expressed as opinion only and do not provide any representation, warranties or guarantees about the outcome of the Users business.
Risk Rating
The Risk Rating uses a Modified Internal Rate of Return (See, Help Browser - MIRR, for definition) with Beginning Total Assets as the initial cash outlay with no debt used in the Deal. Projected EBITDA adjusted by cash flow impact of receivables, inventory and A/P along with an income tax estimate as well as annual equity draws or contributions. The Market Value of the deal or Company after a Long Term Capital Gain tax deduction, without the Liabilities of the Company at the end of the earlier of 10 years or the Horizon Years is used as the cash return at the end of the investment. If a Market Value is not provided by the User, a Hard Asset Value (w/o amortized assets such as goodwill) liquidation of the assets will be used instead.
This is then factored by a Confidence factor based on the historical EBITDA. If there is limited historical information, the Confidence factor will be low which will substantially effect the Risk Rating. This is further factored by a comparison with the current yield of 10 Year United States Treasury Notes.
The ThruThink Evaluation® evaluates only the first 10 years of a deal and will use the Hard Asset liquidation value as the Exit Value at year 10, if there is not a Market Value available. The Exit Value may be entered for only the end of the Horizon time period, however for Horizon time periods over 10 years, for the ThruThink Evaluation®, the User should be sure to at least enter an appropriate Exit Value for Year 10 as well as the end of the Horizon time period.
Confidence Level
The level of confidence is a ThruThink® proprietary calculation on a scale of 1-100 (1 being low), that is given for the future projections for EBITDA as they relate to historical EBITDA actual performance.
The confidence in the future performance should always be taken into account when considering the IRR results. This is a measure of such confidence, however future performance can not always be predicted by historical activity.
Cash Flow Characteristics
Cash Flow Characteristics reflects Beginning Cash Balance and how steady or erratic the projected Cumulative Cash Balance is over the Horizon Years and if the Cumulative Cash Flow becomes negative within the Horizon Years (the scope is limited to the Horizon Years or 10 Years which ever is less). If the Cumulative Cash flow becomes negative indicating the Company runs out of money, there is an automatic negative score given for Cash Flow Characteristics. The measured Cash Flow is the final annual cash flow of the Company after Debt payments, Income Taxes, Capital Expenditures (Sales) and Owner Draws.
Stability of Projections
This reflects how representative is the first three years projection for EBITDA compared with the historic EBITDA performance. No historical performance will cause a zero score. A negative historical trend for EBITDA will detract from the score.
EBITDA to Sales Ratio
This reflects the historical EBITDA/Sales ratio, the current EBITDA Ratio and the ratio through the Year 3 projection with a factor for stability and consistency of the numbers. No historical data available will substantially reduce the EBITDA to Sales Ratio score (See Risk Rating).
EBITDA to Debt Ratio
This reflects the beginning EBITDA/Total Debt ratio. Generally, an EBITDA/Total Debt ratio of between 0 and 3 is considered Excellent to Good. Over 3 to 5 Good to Marginal and a ratio of 5 or over is considered Excessive and negative.
EBIT to Total Assets
This reflects earnings as a percent of total assets deployed. This is a good measure of putting the level of earnings in perspective with the amount of total assets involved.
Working Capital
Working Capital is the difference between Current Assets and Current Liabilities. Current Assets means all assets that are cash or will turn to cash within 12 months of the particular date being considered. Current Liabilities means all Debts that are due to be paid within 12 months of the date being considered. The Current Liabilities should include the Current Portion of Long Term Debt which is the portion of the long term debt that will be due in payments over the next 12 months.
The score considers the Beginning Working Capital along with the Working Capital for year 1-3, however it places a greater weight on the Beginning Working Capital.
Net Total Debt
Net Debt is used to consider leverage or the amount of debt in a Company or Deal. In the ThruThink® analysis, Net Debt is Total Debt less Cash and Accounts Receivable. The effect of leverage or debt on a Company or Deal is expressed by the ratio of Net Debt to Earnings before Interest, Income Taxes, Depreciation and Amortization (EBITDA).
Net Income
This will reflect Net Income along with its variability and trend over the Horizon Years.
Quality of Non Owner Management
This is a direct input by the User. On a 1 to 10 basis (1 being no involvement), how independent is the Management of the Company from the Owner. How much technical, financial or operational involvement is materially or uniquely provided by the Owner. This should involve both compensated and Un-Compensated contribution of the Owner. This score should also reflect the overall capability of the Management separate from the Owner.
Amount of Un-Compensated Owner Contribution
This is a direct input by the User. On an annual basis, how much necessary and material involvement of the Owner is Un-Compensated. This should be only that contribution which would need to be replaced if the Owner were not there. The amount should be that amount that would be required for an outside party to provide similar contribution. The score reflects the amount of Un-Compensated Owner Contribution as compared with the Beginning EBITDA.
Liquidity of the Business
This is a direct input by the User and is an estimate for how many months it would take to sell the Company. Generally this can be from 5 to 36 months.
The measure of Total Company Performance will be for the Company itself from operations and the Exit Sale if applicable. It will reflect the Equity Note payments to the Equity Partners as arms length outside debts. Any Performance Earn Out amount paid to the Seller who may be an Equity Partner is reflected as it would be for a non Equity Partner Seller transaction. Equity Draws do not effect the measure of Company Performance unless noted otherwise.
All Capital Gains in the ThruThink® analysis are considered Long Term Capital Gains representing the sale of assets held longer than one year.
The Capital Gains rate is used for calculating the tax on the Gain on Sale of Assets by the Company and for items that apply to the individual Equity Owners such as their receipt of Performance Note principal payments and the individual Equity Owners after tax Equity Returns from an Exit Sale of the Company. Net Income from these items are all assumed to be Capital Gain.
The sale of assets are recorded by entering a negative number on the Step 7 Capital Expenditures (CapEx) page. See Help - Capital Expenditures. A negative number entered should reflect the net Book Value (after deduction for depreciation) for the asset sold. All proceeds from an asset sale will decrease the Asset Class (ex: all assets booked as Machinery & Equipment) value. Accumulated Depreciation will be adjusted automatically by formula calculation. (See Help - Cap Ex). When the Asset Class is reduced to zero, excess proceeds up to the amount of the accumulated depreciation for that Asset Class will be considered as depreciation recapture and be taxed as Ordinary Income. After the Asset Class is reduced to zero, excess proceeds that exceed the Accumulated Depreciation for the Asset Class prior to the sale, will be considered as Long Term Capital Gain.
An Adjusting Journal Entry (AJE) may be made to Capital Gain Income in any year of the Horizon Period to record a Capital Gain for an asset sale prior to the asset class being reduced to zero.
Since the effect of all asset sales entered through the Step 7 Capital Expenditures (CapEx) page are incorporated net book value to the Asset Class, Gains or Losses on the sale of assets are booked with an Adjusting Journal Entry (AJE) to Gain (Loss) on Sale of Assets in any year of the Horizon Period.
A Long Term Capital Loss will not be applied to Ordinary Income and will carry forward to succeeding years and applied to future Capital Gains.
Deferred Tax Expense is generated from the difference between the depreciation expense as calculated on a Book Depreciation basis vs. Tax Depreciation Basis.
Deferred Tax Liability is generated from the difference between accrual basis tax calculations and the taxes paid, if taxes are calculated on a cash basis as well as from the tax impact of the difference between Book Depreciation and Tax Depreciation. Deferred Tax Liability may also be generated from an Existing Company beginning balance or a User generated Adjusting Journal Entry.
The User may choose to pay tax on a cash or accrual basis, but the Income Statement will use the accrual based tax as an expense. If the User chooses to pay tax on a cash basis, the difference between the accrual tax and the cash basis tax will be reflected as a Deferred Tax Liability.
The User may choose to use different depreciation inputs for Book vs. Tax purposes. The Accrual Income Statement uses Book Depreciation as the depreciation expense. If Tax Depreciation is greater than the Book Depreciation, a deferred tax expense is generated on the difference as the tax paid on taxable net income is less than the accrual net income. This deferred tax expense will become a Deferred Tax Liability on the Balance Sheet.
When the Tax Depreciation is greater than the Book Depreciation, the Tax Depreciation expense will "run" out before the Book Depreciation which will cause the Taxable net income to be greater than the Accrual Net Income and generate more tax expense than that showed on the Accrual Income Statement. As this happens, the Deferred Tax Liability on the Balance Sheet will be reduced when the Book Depreciation becomes greater than the Tax Depreciation.
The User may not enter a depreciation life for book depreciation that is less than for tax that would cause a Deferred Tax Liability credit (negative liability), however, AJE's may be made to the Deferred Tax Liability account in the Balance Sheet, which may include a Tax Credit (negative liability) or Deferred Tax Liability.
If the Beginning Existing Company Balance Sheet is involved, it may contain a beginning tax credit. If this exists, the credit will be used on the first available tax owed.
If a tax credit is generated from an AJE, the credit will also be used on the first available tax owed, or it can be reduced by another AJE.
If on the Beginning Existing Company Balance Sheet, the Equity Adjustment option is used and the User selected the adjustment to be subject to income tax, the tax will be Ordinary Income Tax and can be paid by a User generated Adjusting Journal Entry.
A net Operating Loss Carry Forward (NOL) is a carry forward tax loss from previous years and can be applied to future years to reduce future years taxable income.
This information should be provided by the Users accountant or tax preparer and the User should be certain that the NOL will actually be available and apply to the entity future taxable net income that is represented in these projections.
If an NOL input is necessary, the User should select Existing Company in Step 1 in order to utilize the Deferred Liability input capability as discussed below.
When entering an NOL amount here, a corresponding input for the asset value for this NOL (NOL multiplied by a tax rate=value) should be made. This is done by entering a negative number for the beginning Deferred Tax Liability balance in Step 6. A negative number for this liability will produce a negative Liability. This is like an asset and is considered a Tax Credit against future years net income for tax calculation purposes.
In the ThruThink® analysis, the NOL will apply to both Federal and Region taxable net income.
In the analysis, for tax payment purposes, the NOL will be applied against the next year of positive net income (Taxable Year), thereby reducing actual taxes owed for that year and succeeding positive net income years until completely used.
The actual tax calculated for the Taxable Year (Taxes Owed) will be expensed in the Taxable Year.
For Cash Flow purposes, there are estimated tax payments paid during the Taxable Year on a quarterly basis in Period 4, 6, 9 and 12 of the Taxable Year. Actual taxes are then calculated for the Taxable Year and paid in Period 4 of the following year with a credit taken for the estimated payments paid during the Taxable Year.
In the Taxable Year, the Deferred Tax asset will be reduced and expensed as a non-cash Deferred Tax Expense on the Income Statement. From an accrual point of view (see Help Topic for explanation of Accrual), the Income Statement for the Taxable Year will show a tax expense for the Taxes Owed (that was reduced by the NOL) as well as a Deferred Tax expense to reflect the write-off of the Tax Credit asset in the Taxable Year.
At the end of the Taxable Year there will be an Income Tax Liability for the difference between the Taxes Owed and the estimated tax payments made during the Taxable Year.
In the same manner as the initial NOL, losses incurred during the Horizon Years will be carried forward and applied to Net Income in the subsequent years.
The input for the NOL can be found on the Tax Rate Input page
Taxes may be calculated on either the Accrual or Cash Basis by a User selection on the Tax Rate form.
These tax calculations are projections and by nature are approximate with no representation as to adhearing to GAAP or other specific accounting procedure or tax code.
For the Accrual Basis, taxable net income is calculated using income and expenses when they are incurred regardless of whether the income has been received or expense has been paid in that same period.
For the Cash Basis, taxable income is calculated using income and expense received or paid during the applicable term.
Regarding inventory, cash paid to create inventory (see Inventory - Future Terms Set-up) or User capitalized expenses (see Info Browser - Individually Scheduled Income/Expense, Capitalized Expenses) is counted as an Inventory Asset and not counted as an Expense in both the ThruThink® Accrual or Cash Basis method of accounting (see Info Browser - Tax Rates). Therefore when the User chooses the ThruThink® Cash Basis for calculation of income taxes, cash paid for inventory will not be counted as an expense for income tax purposes.
If the User selects Cash Basis to calculate income taxes, the Income Statement will still be on an accrual basis with accrual based taxes as an expense, but the cash flow will reflect the Cash Basis tax payments. Any difference between the Accrual Basis taxes and the Cash Basis taxes will be shown on the Balance Sheet as a Deferred Liability when Cash Basis taxes are less than Accrual Basis taxes or as a negative Deferred Liability when Cash Basis taxes are higher than Accrual Basis taxes.
When the Transaction Deal Structure does not provide the required amount of capital either through Debt or Equity, there will be an "Additional Funds Required" amount shown on the Transaction Sheet Deal Structure. If the Equity holders in the Deal own 100% of the equity of the post closing company (Step 8), the additional funds required will flow to the Equity Section of the Balance Sheet as assumed equity provided and will be shown in a separate line of the Equity Section of the Balance Sheet as "Additional Funds Required".
If the Equity holders in the Deal are not purchasing 100% of the equity of the post closing company (Step 8), i.e. they are only purchasing a portion of the Company, the additional funds required will not flow to the Equity Section of the Balance Sheet as the post closing Balance Sheet represents 100 % of the Company. Because the purchase is less than 100% of the Company, the Deal Transaction is between the old equity holders and the new equity holders and will occur outside the Company's post closing balance sheet. Therefore the "Additional Funds Required" is only for information purposes.
For the Transaction Sheet Accounts Payable provision and Other Debt category, each have a provision for indicating it to be assumed Seller Debt. If this is indicated by the User, the Assumed Seller Debt will be reflected and attributed to the Sellers Value in the Acquisition Closing Statement as value received by the Seller from the Sale.
The amount of Debt, Interest Rate and repayment terms a Company can carry will depend on the Earnings before Interest, Taxes Depreciation and Amortization (EBITDA) and the EBITDA performance of the Company going forward.
After the User inputs Steps 1-8, the User can review the Cash Flow Control and adjust the future performance of EBITDA to reflect expectations. The debt carry capacity can be determined at this point by observing both the Net Income and Cash Flow. If the net income is sufficiently stable and growing, but the Cash Flow is unacceptable, among other things, the debt repayment terms might be able to be adjusted to lengthen the time required to repay the principal or more cash equity may be indicated (less debt) or the purchase price of the Company can be adjusted.
If on the other hand, after reviewing the Net Income and Cash Flow, the Net Income is not sufficient and the Cash Flow is unacceptable, the EBITDA expectations can be reviewed or the entire deal structure can be adjusted (Purchase Price, Debt Structure and/or Equity structure).
Assumption of Seller Debt
Assuming the Sellers debt can be a way of providing the Seller a greater purchase price and the Buyer not having to come up with more cash or additional outside debt financing. This is only a tool for the Buyer, as the assumed Seller debt is debt and will require repayment just as outside debt. The only difference is it may be easier for the Buyer to acquire (and possibly cheaper?) than outside debt. Care should be taken by the Buyer however, to fully understand the terms, security and obligations of the Seller Debt. This debt may carry onerous conditions such as the note holder having the right to buy the Company's products at a fixed price or the Company is obligated to buy products from the Note holder at a fixed (above market) price. Buyer beware!
For the debts on the Transaction Sheet, the question, "Will this loan be funded at Close of Escrow or as of the Effective Date?" is asked upon debt detail input.
If Yes is selected, the funds from the loan will be available as cash flow for the Close of Escrow and become part of the capital used to purchase the Company and provide the beginning Working Capital.
If No is selected, the loan will not be funded during the Close of Escrow, however the terms as entered in the Debt setup will apply for the future.
The Effective Date is entered in Step 2 and is referred to as the Point of Reference in the ThruThink® analysis or the beginning point of the analysis. If no date is entered in Step 2 then the Current Date (todays date) is used as the Effective Date. The Transaction Sheet, Target Company and Existing Company Balance Sheet items should all be as of the Effective Date. The Base Sales and EBITDA inputs in Step 3 should be as of the Effective Date.
For the Existing Company, in Step 3, there is an option to enter a date for the last Fiscal Year End for the Existing Company. If the Fiscal Year End Date is different than the Effective Date, there is an adjustment option in both the Asset and Debt Input pages that would allow amounts to be entered that would adjust the beginning Balance Sheet from the Fiscal Year End to the Effective Date. All beginning Asset and Debt amounts need to be as of the Effective Date making it much simpler to have the Effective Date be the same as the Fiscal Year End.
For the Target Company, there is no option for entering a Fiscal Year End, so the Effective Date in Step 2 should be the Date for all beginning Assets and Debt amounts for the Target Company.
Purchase the Target Company
When purchasing the Target Company, the Target Company's Sales, EBITDA, the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Target Company are entered on the Transaction Sheet through the inputs in Step 3, 5 and 6. The Equity Structure for the ownership of the Target Company is entered in Step 8 for the purchase and will flow to the Transaction Sheet.
Purchase the Existing Company
When purchasing the Existing Company, the Existing Company's Sales, EBITDA, Assets and Liabilities are entered for the Existing Company options in Steps 3, 5 and 6 and the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Existing Company is for the Transaction Sheet options in Step 3, 5 and 6. The Equity Structure for the purchase is entered in Step 8 and will flow to the Transaction Sheet.
When purchasing the Existing Company, the Debt and Equity required to acquire the Existing Company should be entered using the Transaction Sheet options. This is new acquisition debt as well as new Existing Company debt (after the Effective Date). In this manner, for example, if there are assets at the Existing Company that can be used for additional debt after the Effective Date, the additional debt should be entered on the Transaction Sheet and those proceeds as well as Equity Debt and or the Contributions from outside Equity will become part of the capital structure assembled to acquire the Existing Company. After the acquisition, all the debt and equity from both the Transaction Sheet and the Existing Company will be rolled into the post closing Balance Sheet.
Existing Company Purchases the Target Company
When the Existing Company is purchasing the Target Company, the Transaction Sheet option is used for the Target Company Information and the Existing Company option is used for the Existing Company in Steps 3, 5 and 6. The Existing Company must be listed (using exact Existing Company name) as one of the Equity Partner Groups through the Equity inputs in Step 8. Any cash required of the Existing Company as an Equity Group will be taken from the cash listed on the Existing Company Input page. If there is not enough cash in the Existing Company's balance sheet, the Existing Company Equity Group cash contribution above the cash shown on the Existing Company Balance Sheet will not be allowed as a cash input on the Transaction Sheet Equity input.
Because information from the Transaction Sheet and the Existing Company Sheet are combined into the post Closing (Effective Date) Balance Sheet, if the Existing Company is purchasing the Target Company both the Sales and EBITDA information entered in Step 3 for the Existing Company and the Target Company will become the base information going forward as of the close of escrow or the Effective Date. Care should be taken not to duplicate and Sales or EBITDA information between the Target Company and the Existing Company.
As noted above in purchasing the Existing Company, when the Existing Company is Purchasing the Target Company, if there are assets at the Existing Company that can be used for additional debt to acquire the Target Company, the additional debt should be entered using the Transaction Sheet option and the proceeds will become part of the capital structure assembled to acquire the Target Company. The Transaction Sheet Debt will be combined with the Existing Company Debt after the Effective Date (Acquisition Date). The additional debt the Existing Company raises on its own assets as well as the assets of the Target Company and equity debt/contributions from the Equity Groups to provide cash to purchase the Target Company can be seen on the Information Tab Transaction Views through the Transaction Deal Structure and Transaction Buyers and Sellers Statement. The Transaction Sheet Debt will be combined with the Existing Company Debt after the Effective Date (Acquisition Date).
The Transaction Sheet is separated into three parts, the Transaction Deal, the Deal Structure and the Buyers and Sellers Statement from the Transaction.
Transaction Deal Page
The Transaction Deal page lists the Sales and EBITDA for which the Deal is Based and the Purchase Price for the transaction.
Transaction Deal Structure
The Deal Structure Page lists the sources of funds that will be used to complete the transaction.
Buyers and Sellers Statement
The Buyers and Sellers Statement is a summary of the sources and uses of funds and assets purchased in the Transaction.
Purchase the Target Company
When purchasing the Target Company, the Target Company's sales, EBITDA, purchase price and assets of the Target Company as well as the acquisition debt or additional debt required (see below) for the acquisition of the Target Company are entered on the Transaction Sheet through the Transaction Sheet input pages. The Equity Structure for the ownership of the Target Company is entered in Step 8 for the purchase and will flow to the Transaction Sheet.
After the acquisition, all the assets of the Target Company and the debt and equity used to purchase the Target Company from the Transaction Sheet will be rolled into the post closing Balance Sheet.
Purchase the Existing Company
When purchasing the Existing Company, the Existing Company's Sales, EBITDA, Assets and Liabilities are entered on the Existing Company Input Sheet and the Purchase Price, Acquisition Debt or additional debt required (see below) for the acquisition of the Existing Company is using the Transaction Sheet options in Step 3, 5 and 6. The Equity Structure for the purchase is entered through Step 8 and will flow to the Transaction Sheet.
When purchasing the Existing Company, the Debt and Equity required to acquire the Existing Company should be entered on the Transaction Sheet. This is new acquisition debt as well as new Existing Company debt (after the Effective Date). In this manner, for example, if there are assets at the Existing Company that can be used for additional debt after the Effective Date, the additional debt should be entered on the Transaction Sheet and those proceeds as well as Equity Debt and or the Contributions from outside Equity will become part of the capital structure assembled to acquire the Existing Company. After the acquisition, all the debt and equity from both the Transaction Sheet and the Existing Company will be rolled into the post closing Balance Sheet.
Existing Company Purchases the Target Company
When the Existing Company is purchasing the Target Company, the Transaction Sheet option is used for the Target Company Information and the Existing Company option is used for the Existing Company in Steps 3, 5 and 6. The Existing Company must be listed (using exact Existing Company name) as one of the Equity Partner Groups through the Equity inputs in Step 8. Any cash required of the Existing Company as an Equity Group will be taken from the cash listed on the Existing Company Input page. If there is not enough cash in the Existing Company's balance sheet, the Existing Company Equity Group cash contribution above the cash shown on the Existing Company Balance Sheet will not be allowed as a cash input on the Transaction Sheet Equity input.
Because information from the Transaction Sheet and the Existing Company Sheet are combined into the post Closing (Effective Date) Balance Sheet, if the Existing Company is purchasing the Target Company both the Sales and EBITDA information entered in Step 3 for the Existing Company and the Target Company will become the base information going forward as of the close of escrow or the Effective Date. Care should be taken not to duplicate and Sales or EBITDA information between the Target Company and the Existing Company.
As noted above in purchasing the Existing Company, when the Existing Company is Purchasing the Target Company, if there are assets at the Existing Company that can be used for additional debt to acquire the Target Company, the additional debt should be entered using the Transaction Sheet option and the proceeds will become part of the capital structure assembled to acquire the Target Company. The Transaction Sheet Debt will be combined with the Existing Company Debt after the Effective Date (Acquisition Date). The additional debt the Existing Company raises on its own assets as well as the assets of the Target Company and equity debt/contributions from the Equity Groups to provide cash to purchase the Target Company can be seen on the Information Tab Transaction Views through the Transaction Deal Structure and Transaction Buyers and Sellers Statement.
Company Asset Value - Thoughts to Consider
If the Company has limited current profitability and the future profitability is dependent primarily on what the Buyer will contribute, then the purchase price of the Company should more closely reflect the net liquidation value of the Company's hard assets. On the other hand, if the value of the assets exceed the Purchase Price, then the Purchase Price should be adjusted to reflect the Net Liquidation Value of the assets or split the Company purchase to be (1) Buyer purchase of the business value and (2) liquidation of excess assets by either the Seller or Buyer depending on the situation.
The Seller should receive the greater of the Business Value of the Company (EBITDA Multiple) or Net Liquidation Value of the Company's assets. Using Net Liquidation Value, it should be considered that a used asset value will usually reflect discounts for specialized use, excessive time to liquidate, condition of the asset, cost of removal, cost of reinstallation and the value of new replacement . It is not uncommon to have Liquidation Values for some assets be 10-20% of the original cost of the asset. Of course, in some unique cases where the cost of new replacement has significantly increased from the original cost of the Company asset, the Company asset may retain it's original cost value. This will generally be the exception however.
This provision is intended for the User who is a Buyer of the Company to Write Off a percentage of the initial Asset value that is being paid to the Seller of the Company to reflect general confidence issues with the asset at the time of purchase or analysis.
If a certain value must be paid to the Seller, however the User (Buyer) doubts the value used for the asset, the User can write off a portion of the beginning value but not change the Purchase Price paid to the Seller. The value after the Write Off will flow into the post closing Balance Sheet.
The Input is a Percentage of the value being paid to the Seller of the particular Initial Asset Value.
The Initial Write Off will reduce the initial value of the asset by the % of the Write Off. The write off will apply to the applicable balances of the indicated asset for either the Transaction Sheet or the Existing Company financial input sheet. The Write Off will be applied in the pre-closing transaction and adjust the beginning balance of the first period. It should be considered as an adjustment to the beginning basis value of the assets involved. It will not have an effect on net income or loss.
The effect of the Write Off will be to increase the Goodwill paid for the Company.
This input is available on the Transaction Sheet Asset Input page for the major asset categories and is found in Step 5.
When the Equity holders in the Deal are only purchasing a portion of the equity of the Company being purchased, the assets of the purchased company can not be used to fund debt for the Transaction nor can new debt be added to the purchased company as a result of the Transaction. When only a portion of the Company is being purchased, the funds transfer will be outside the Company between the Seller and the Buyer. In this manner the integrity of the old equity holders position in the company is maintained.
Purchasing a Portion of the Company
When the Equity holders in the Deal are only purchasing a portion of the equity of the Company being purchased, the assets of the purchased company can not be used to fund debt for the Transaction nor can new debt be added to the purchased company as a result of the Transaction. When only a portion of the Company is being purchased, the funds transfer will be outside the Company between the Seller and the Buyer. In this manner the integrity of the old equity holders position in the company is maintained.
Tax Calculations
The Tax Rate Schedule is for the convenience of the User. Any default entries are very general in nature. This schedule and the User Inputs should only represent generalized tax rates to provide an estimated expense for income taxes. These rates should be updated by the User for any specific year, country, state or region.
Income Tax Expense in the Income Statement and the Liability for the Income Taxes Due in the Balance Sheet are calculated on the Accrual Basis. The User may choose to pay taxes on a Cash Basis and the cash tax payments will be calculated and paid accordingly. The Cash Flow Control will reflect the Taxes paid.
There are two types of Income Tax intended as a Federal or Country Income Tax and a State or Region Income Tax.
The income tax calculations in this analysis are not intended to reflect actual tax computations based on any tax code. They are intended to give only a very general indication or estimate of tax expense using the rates indicated on the Tax Rate page as applied to basic unadjusted net gains from a sale or net income from operations as defined in this analysis. A tax specialist should be consulted using the appropriate tax code for a more specific estimate of the tax expense or liability on any individual situation.
For each type of tax, the Tax Rate Input page allows for up to seven graduated taxable income levels. For simplicity, the default is just one tax level for all taxable net income. The User may adjust accordingly.
The ThruThink® analysis will apply the rates shown in the Tax Rate Input page to the Taxable Net Income calculated by the analysis for the future years. The Taxable Net Income is a basic generalized assessment of Taxable Net Income using EBITDA less Interest paid less the Tax basis depreciation and amortization expense as set up in the ThruThink® analysis by the User.
The actual tax calculated for any given year (Taxable Year) will be expensed in the Taxable Year.
For Cash Flow purposes, there are estimated tax payments paid during the Taxable Year on a quarterly basis in Period 4, 6, 9 and 12 of the Taxable Year. Actual taxes are then calculated for the Taxable Year and paid in Period 4 of the following year with a credit taken for the estimated payments paid during the Taxable Year.
At the end of the Taxable Year there will be an Income Tax Liability for the difference between the Taxes Owed and the estimated tax payments made during the Taxable Year.
With ThruThink®, there is a provision to apply Net Operating Losses (NOL) from previous years to the Taxable Income of the Taxable Year. Please see separate Help Topic for Net Operating Loss carry forward.
This is an optional input found in Step 4 when entering the Purchase Price for the Company . This input pertains to a situation where the Seller will be retaining ownership of assets that are normally included in the value indicated. This may also become useful when the Buyer is not able to offer the Seller the Sellers desired sale price or there is an disagreement between the value of the asset to the Seller and the value to the Buyer. With this option, the Seller may retain the value of certain assets of the Company and lease them back to the Company after the Company is sold. In this manner, the Buyer can agree to a lease rate that is commensurate with the assets contribution value.
The Seller Retained Assets will be subtracted from the Value indicated. The full value can be used as the Company value and the amount indicated with this Input will reduce the value by the amount retained by the Seller. In the Debt Input section, there is a provision to lease assets back from the Seller if applicable. By including the Seller assets in the gross value and then subtracting them out, the Buyers and Sellers Sale Statement on the Transaction Sheet will reflect the full benefit of the business value plus the retained assets to the Seller.
This option only applies in certain circumstances and the Seller Retained Assets Input may be left blank if this option is not desired.
When more funds are provided thru the debt and equity contributions in the Transaction Sheet than is required for the Transaction, the amount over that required for the Transaction will be deemed Surplus Funds.
Surplus Funds can be created in the Transaction from either new debt or cash equity contributions generated for the Transaction or pre-existing debt assumed from the Seller that is being used in the Transaction.
Surplus Funds created from new debt or equity contributions will be considered distributed during the acquisition escrow to the Equity Groups in the percentage of their equity contributions or in the case of no equity contributions, their equity ownership in the Company and reflected as an Equity distribution in the Equity Section of the post closing beginning Balance Sheet.
If there are Surplus Funds, the IRR/MIRR calculations will default to "0" as there is no investment on which to calculate a return.
Transaction Fees and Due Diligence Expenses are any expense incurred for the process of acquiring the Company prior to the actual purchase of the Company (Effective Date).
These expenses will be capitalized and be included in the Amortized Asset category on the post closing Balance Sheet and be amortized (expensed) over the period selected by the User.
These expenses include legal, accounting, advisory expenses of putting the deal together as well as the expenses to investigate the Company prior to the purchase (Due Diligence). Examples of Due Diligence expenses are legal, accounting and consulting expenses to verify the assumptions used in preparing the purchase offer.
The input for Transaction Fees and Due Diligence Expenses can be found in Step 7.
Beginning Working Capital Cash is the amount of cash required for working capital at the close of escrow or the Point of Reference Date (Effective Date).
The amount of this number is highly influenced by the cash flow generated by the Company prior to the Effective Date. If the Company has a good predictable stable monthly cash flow, this number can be lower. If on the other hand the Company is a Start Up, has a history of minimal or negative cash flow, the amount Beginning Working Capital Cash required will be larger.
The Beginning Working Capital Cash will become a requirement of cash along with the other cash requirements of the purchase escrow and will be a Use of Cash that determines the amount of Debt and Equity required to complete the Company purchase.
To determine the amount of Beginning Working Capital Cash required, complete the inputs into the ThruThink® analysis without the Beginning Working Capital Cash and check the cash flow results for the foreseeable future years. If the Cash Balance is or becomes minimal or negative but recovers after an appropriate period of time, this will be a guide for the amount of Working Capital Cash required which will indicate the Beginning Working Capital Cash number.
If the Cash Balance is minimal or negative over a sustained period of time, the User should reconsider the underlying Sales/ EBITDA performance of the Company, the debt structure, the amount of Equity or a combination of all of those factors to see if the deal structure or the deal itself makes sense.
Working Capital is the difference between Current Assets and Current Liabilities. Current Assets means all assets that are cash or will turn to cash within 12 months of the particular date being considered. Current Liabilities means all Debts that are due to be paid within 12 months of the date being considered. The Current Liabilities should include the Current Portion of Long Term Debt which is the portion of the long term debt that will be due in payments over the next 12 months.
Working Capital is generally used as a consideration of the Company or Deal being able to pay it's obligations currently due which is defined as within the next 12 months.