Fixed Assets @ Fair Market Value (FMV)
See Inputs and Balance Sheet for general instructions.
Following points explain how the fair market value (FMV) of the fixed assets entered in this cell is used and how other cells may require modifications depending on the amount entered here.
Enter the Fair Market Value (FMV) of the Fixed Assets (FA) required to generate the Final Adj. EBITDA. (Tip: During early stages of valuation, user may not know the Fair Market Value of the fixed assets. A quick estimate can be, FMV equals net book value of the fixed assets plus 50% of the accumulated depreciation, or FMV equals original cost of the fixed assets less 50% of the accumulated depreciation. After valuing the business based on an estimated FMV of the fixed assets, user can change this estimated FMV and test its impact on the value of the business. Such early approximations for FMV of the fixed assets should later be replaced with actual FMV of the fixed assets).
Fair Market Value of the fixed assets is used to calculate term loan financing from the bank in an Asset and a Stock purchase. The amount of term loan financing is calculated by multiplying the FMV entered in this cell with the Advance Rate entered in the Term Loan: % of FMV of FA. Example: If FMV is 1000, and Advance Rate is 80%, BVX determines that up to 800 is available in term loan financing.
BVX depreciates FMV of the fixed assets in an Asset purchase, on a straight-line basis, over a period of years entered in Miscellaneous: Old Fixed Assets Write-off or at a rate specified in Internal Settings.
SBA financing or Cash Flow lending typically involves a loan amount that is more than the value of the fixed assets. In these situations, enter the fair market value of the fixed assets and enter a high Advance Rate in Term Loan: % of FMV of FA. Example: If FMV is 50, and SBA or a cash flow lender will provide a term loan of 400, which is 8 times the FMV, then enter 800% as the Advance Rate in Term Loan: % of FMV of FA. (Note: Over Advance Loan and Mezzanine Financing in Advanced Features can be used as additional term loans.)
For advanced users:
Fixed Assets Write-up: Amount entered in this cell should be the Allocated Value (AV) to the fixed assets rather than the FMV of the fixed assets. AV is supposed to be the same as the FMV of the fixed assets. However, often AV is negotiated to be a different amount between the buyer and the seller for reasons explained below.
Buyer likes to step-up (or write-up) the fixed assets to FMV, which is usually higher, not always, than the cost basis of the assets. This gives the buyer a higher depreciation basis. However, Seller does not like the step-up due to tax implications of depreciation recapture. Often, they wind up negotiating a compromised value to be allocated to the fixed assets. Enter the mutually agreed value allocated to the fixed assets if it is different than the FMV.
Banks, on the other hand, provide the term loan based on the FMV of the fixed assets, not on the basis of the allocated value. If AV is different than the FMV, enter AV for the fixed assets in this cell, and adjust the Advance Rate in Term Loan % of FMV of FA.
Example: FMV is 1000 and the cost basis is 400. Assume the bank would loan 800 or 80% of FMV. Enter 1000 if seller would permit the assets to be stepped up to 1000. However, if the seller/buyer agree to step up the assets to only 500, then enter 500 for FMV and enter 160% for the Advance Rate. In both cases, the bank loan will be calculated to be 800.
Deal Tip: In many Asset purchase transactions buyer assumes that he will be able to step-up the fixed assets to FMV. Seller discovers buyer's step-up intentions near the closing time when price allocation gets discussed. If the assets are highly depreciated, the tax burden of depreciation recapture from the step-up can be significant to the seller. And, to make matters worse, 100% of such recapture tax is due at closing. Such late discoveries risks deal closing. With BVX a deal maker can quickly analyze the valuation impact of various allocations to the fixed assets during the early stages of the deal and not let it become a deal killer towards the end.
This comment applies to situations where the business or the company owns the real estate used in the business. In such situations, BVX recommends that the business and the real estate should be valued separately, and the then the two valuations should be combined for total value of the business. To value the business w/o the real estate:
1) reduce the EBITDA of the business as if the business is paying a fair market rent for the real estate, and
2) enter the FMV fixed assets excluding the real estate. Also, see EBITDA and Less Rent if not deducted.