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Re: Selling Receivables
Generally, A/R is not considered capital structure so no change to TEV. However, as you noted, the change arises due to the increase in Cash balance since you sold the A/R and got cash. This in turn lowers your Net Debt (cash is higher) and affects TEV.
To get a true apples to apples comparison, ...
Generally, A/R is not considered capital structure so no change to TEV. However, as you noted, the change arises due to the increase in Cash balance since you sold the A/R and got cash. This in turn lowers your Net Debt (cash is higher) and affects TEV.
To get a true apples to apples comparison, we would reduce the third comp by the amount of A/R that they sold. So, for the third comp, reduce their cash balance by $100MM and increase A/R by $100MM (only if you care about balance sheet which you don't if only spreading comps here). This will reconcile the three companies. Just like in cases of LIFO vs. FIFO, one would make the adjustment as well purely and solely for comparability purposes.
In the case of M&A, we don't care by the way. Because we have minimum working capital adjustments in purchase agreements that reconcile this. The issue you brought up only applies in the case of valuation and comparability. Read More
To get a true apples to apples comparison, we would reduce the third comp by the amount of A/R that they sold. So, for the third comp, reduce their cash balance by $100MM and increase A/R by $100MM (only if you care about balance sheet which you don't if only spreading comps here). This will reconcile the three companies. Just like in cases of LIFO vs. FIFO, one would make the adjustment as well purely and solely for comparability purposes.
In the case of M&A, we don't care by the way. Because we have minimum working capital adjustments in purchase agreements that reconcile this. The issue you brought up only applies in the case of valuation and comparability. Read More
Re: Selling Receivables
This question was posed to me in an interview. I now understand the Cash adjustment, however I still don't have a very clear understanding of the interest expense adjustments. I was told something along the line of, when you sell receivables for financing purposes, they are usually purchased at a di...
This question was posed to me in an interview. I now understand the Cash adjustment, however I still don't have a very clear understanding of the interest expense adjustments. I was told something along the line of, when you sell receivables for financing purposes, they are usually purchased at a discount. As a result the discount in receivables are often booked as interest expense? So that interest expense would also increase in this case? I can't remember whether this was what I was told but is this how interest expense is affected? Thank you.
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Re: Selling Receivables
It depends on if you sell the receivables with or without recourse. Non-recourse (the bank takes the hit upon default by customer) factoring is considered to be SOLD to the buyer (the bank). In such a case, the "fee" is treated similar to regular Trade Discounts:
Recall the four things that reduc...
It depends on if you sell the receivables with or without recourse. Non-recourse (the bank takes the hit upon default by customer) factoring is considered to be SOLD to the buyer (the bank). In such a case, the "fee" is treated similar to regular Trade Discounts:
Recall the four things that reduce Gross Sales to Net Sales (the latter is reported on IS):
- Warranties
- Bad Debt
- Returns
- Trade Discounts
All of these four are accruals made at the time of sales and reduce Sales. A/R factoring without recourse would be treated similarly as a trade discount.
On the other hand, if the A/R has been sold WITH recourse, meaning the buyer (bank) doesn't take the hit upon default, but rather the seller (manufacturer) takes any hit upon default, that IS considered a loan and the A/R is simply collateral. If that's the case, then interest expense IS incurred because that is considered a loan and yes, interest expense as a result, does indeed go up. Read More
Recall the four things that reduce Gross Sales to Net Sales (the latter is reported on IS):
- Warranties
- Bad Debt
- Returns
- Trade Discounts
All of these four are accruals made at the time of sales and reduce Sales. A/R factoring without recourse would be treated similarly as a trade discount.
On the other hand, if the A/R has been sold WITH recourse, meaning the buyer (bank) doesn't take the hit upon default, but rather the seller (manufacturer) takes any hit upon default, that IS considered a loan and the A/R is simply collateral. If that's the case, then interest expense IS incurred because that is considered a loan and yes, interest expense as a result, does indeed go up. Read More
Re: Selling Receivables
Ah understood, in this case (back to the original problem). The only adjustment that needs to be made on the EV/EBITDA is the Net debt? In addition, can the company have a negative cash balance on their B/S? is this possible?
Re: Selling Receivables
I think we'd rather you increase debt instead of subtract cash. This will avoid negative cash balance, but the impact to Net Debt would be the same either way. Also, keep in mind, we would ONLY do this if only ONE company out of all your comp sets do this. We might even say we don't bother with this...
I think we'd rather you increase debt instead of subtract cash. This will avoid negative cash balance, but the impact to Net Debt would be the same either way. Also, keep in mind, we would ONLY do this if only ONE company out of all your comp sets do this. We might even say we don't bother with this adjustment because if they truly sold the A/R with recourse, then it's as if they simply collected their A/R and is part of their ordinary operations and thus we would NOT make the adjustment. Their Days Receivable Outstanding would be lower than their comps but that's comparing operations not valuation.
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Re: Selling Receivables
Ok, I understand the overall affect on net debt, however, I'm having a hard time grasping the fact that we increase debt by reversing A/R? I'm not sure I understand increasing the debt part intuitively except for the sole fact of not having a negative cash balance.
Re: Selling Receivables
Ok I got it. Is it theoretically and practically possible to have a negative cash balance on a Company's B/S?
Re: Selling Receivables
n Excel, yes anything is possible.
Some lazy ppl get lazy with best practices and have cash go negative. This means you're tapping into your overdraft account, which we prefer to call Revolver. The main difference in modeling implications is difference between your assumed interest income rate and ...
n Excel, yes anything is possible.
Some lazy ppl get lazy with best practices and have cash go negative. This means you're tapping into your overdraft account, which we prefer to call Revolver. The main difference in modeling implications is difference between your assumed interest income rate and interest expense rate (so the spread) * balance. Read More
Some lazy ppl get lazy with best practices and have cash go negative. This means you're tapping into your overdraft account, which we prefer to call Revolver. The main difference in modeling implications is difference between your assumed interest income rate and interest expense rate (so the spread) * balance. Read More
Re: Selling Receivables
does this ever happen in the real world? I don't recall seeing any companies with a negative cash balance on their B/S
Re: Selling Receivables
Only in cases of distressed companies.
Re: Selling Receivables
Thank you, this has been very educational and helpful!
Re: Selling Receivables
You're welcome - that's what we are here for!
There are three comps that you're evaulating EV/EBITDA. Two of the companies have 20m in cash on their B/S and does not sell their receivables for financing reasons. The third comp, sells 100m in receivables. What adjustments do you need to make to EV/EBITDA so that you're comparing apples to apples?
I was told that this transaction would affect net debt and interest expense? Can someone please elaborate on how to make the adjustment and why? Also if possible, please use the above numbers in the example. Thank you. Read More