Definition
Transaction assumptions refer to the inputs used to estimate the total cost of an acquisition and how it will be reflected on the balance sheet at closing. These include the assumed purchase price, deal-related costs, and any cash or debt items that are expected to impact the initial transaction accounting.
These assumptions are necessary to determine the overall funding requirement and to populate the Sources and Uses schedule, which serves as the foundation for structuring the transaction.
Typical Assumptions
While assumptions will vary by deal, typical transaction-related inputs include:
- Entry & Exit Multiple / Purchase Price: Often based on an assumed Enterprise Value using a multiple of EBITDA or revenue.
- Cash to Balance Sheet: Any excess cash contributed at closing, such as to fund working capital or support future operations.
- Transaction Costs: Advisory, legal, and other professional fees incurred in executing the deal.
- Financing Fees: Upfront fees, original issue discounts (OID), and other charges related to raising debt.
- Refinanced Debt: If existing debt is repaid at close, it is included as part of total use of funds.
- Rolled Equity or Seller Proceeds: If management or the seller retains a stake, the equity rollover is modeled as a reduction in purchase equity.
These inputs are closely linked to the Sources and Uses and influence key downstream items such as Goodwill, the Pro Forma Balance Sheet, and ultimately, investor returns.