How I model the Pro Forma Balance Sheet in 7 steps 👇 ~~~ 𝗧𝗟;𝗗𝗥: grab the template here 👉 https://lnkd.in/ex6BKa4E ~~~ 𝟭. 𝗦𝗲𝗹𝗹𝗲𝗿 𝗧𝗮𝗸𝗲𝘀 𝗖𝗮𝘀𝗵 𝗮𝘁 𝗖𝗹𝗼𝘀𝗲 Seller keeps the existing cash because it's value they previously created and doesn't belong to the new buyer. (Often times this is excess cash, not all cash) Steps: Reduces cash, reduces Retained Earnings. 𝟮. 𝗡𝗲𝘄 𝗘𝗾𝘂𝗶𝘁𝘆 Buyer brings new equity to purchase the business. Steps: Equity up, Cash up 𝟯. 𝗡𝗲𝘄 𝗗𝗲𝗯𝘁 Buyer also brought new debt to purchase the business. Steps: Debt up, Cash up 𝟰. 𝗣𝗮𝘆𝗼𝗳𝗳 𝗢𝗹𝗱 𝗘𝗾𝘂𝗶𝘁𝘆 (𝗮𝗸𝗮 𝗯𝘂𝘆 𝘁𝗵𝗲 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀) The cash from the new equity & debt goes to purchase the existing business. Any premium above the equity value is recorded as Goodwill. Steps: Old Equity Paid Off, Goodwill Calculated, Cash goes out (this is "The Purchase") How to calculate Goodwill: Enterprise Value (+) Cash (-) Debt = FMV of Equity (-) Book Value of Existing Equity = Goodwill 𝟱. 𝗣𝗮𝘆𝗼𝗳𝗳 𝗢𝗹𝗱 𝗗𝗲𝗯𝘁 Similar to step 4, new debt comes in, old debt goes away. Steps: Reduce old debt, reduce cash 𝟲. 𝗧𝗿𝗮𝗻𝘀𝗮𝗰𝘁𝗶𝗼𝗻 𝗙𝗲𝗲𝘀 These are an expense for the new buyer (to get the deal done), so it immediately hits Retained Earnings. Steps: Retained Earnings down, Cash down 𝟳. 𝗗𝗲𝗯𝘁 𝗙𝗲𝗲𝘀 Under the "old method," you would record the deferred financing fees as an asset. Today they're recorded as either a contra-liability or asset depending on the type of debt. The impact on the P&L is the same (amortization), so I often prefer the "old method" to keep my model cleaner. Steps: asset up, cash down 𝗪𝗮𝘁𝗰𝗵 𝘁𝗵𝗲 𝗖𝗮𝘀𝗵 In every step, you can see how the cash immediately flows in and subsequently flows out in order to complete the purchase. The ending result is the "Pro Forma Balance Sheet" that reflects the new debt, new equity, and cash balance for the buyer ($500k in this case). ~~~ 👋 Hey, I'm Chris Reilly, and I post about middle-market Financial Modeling based on real Private Equity and FP&A experience. 𝘱.𝘴. don't forget to grab the template here 👉 https://lnkd.in/ex6BKa4E
This step-by-step breakdown of the Pro Forma Balance Sheet is incredibly insightful. Understanding cash flow at each stage is crucial for effective financial modeling.
This is a comprehensive guide, thanks for sharing such valuable insights.
I really enjoyed your post. It presents a very insightful approach. Well done!
This is invaluable! I appreciate how clearly you've outlined each step. Chris Reilly
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Founder of the Ultimate Financial Modeling Mastery Program.
2moNotice the very bottom row where it says "check." Each adjustment to your Balance Sheet should satisfy the Accounting Equation and balance. If not, something is off.