Output: BVX® Cash Flow

BVX® Cash Flow is the cash flow of the business after fulfilling all its obligations, maximizing available borrowing and putting aside .  See details in .

Additional Revolver is the additional money borrowed against the working capital. BVX® tries to maximize this borrowing in order to maximize price. See details in .

Taxable Income is the taxable income of the buyer after the acquisition. BVX® works on cash flow basis, not on the basis of income. Hence, taxable Income can be negative even though the cash flow is positive. See details in . 

Output: Business Value

Business Value is the multiplication of Year-0 Adj. EBITDA times the Purchase Price Multiple. Purchase Price Multiple is either determined by BVX® when is used or is entered by the user in .

Business Value is the Enterprise Value of the business. It excludes non-operating assets and non-operating liabilities. Enterprise Value is also known as the debt-free value of the business, or the Market Value of Invested Capital. Business Value is not the Equity Value of the business. See .

Output: Buyer Equity

Buyer Equity is either the one calculated by BVX® using or is the one manually entered by the user in . Deal Optimizer™ calculates buyer equity through iterations to satisfy the needs of all parties to the transaction.

Output: Goodwill

Goodwill is the difference of Business Value minus the Net Assets value minus amounts allocated to non-compete, personal goodwill, etc. For detail explanation see . Goodwill is usually positive for most businesses. However, it can be negative if the business is not generating adequate profits to support the assets utilized in the business. If Goodwill is negative liquidation of the assets may provide higher value than the one determined by BVX®.

Output: Bank Loan

Bank loan is the total amount borrowed from the lenders to fund the acquisition. It includes amount borrowed against A/R and Inventory, the Term Loan, the Over Advance Loan and the Mezzanine Loan. BVX® only borrows the amount that can be serviced by the cash flow of the business. For detail explanation see .

BVX® only borrows the amount that can be serviced by the cash flow of the business.

The bank Loan cell changes color to purple if the amount borrowed is less than the amount available.

Output: Real Estate Summary

This section provides summary financials for the Real Estate. BVX does not calculate real estate value. However, it provides the ability to calculate RE financials including ROE on the Real Estate. Clicking in Advanced Features on the Overview screen opens Real Estate data entry screen. Real Estate financial details are provided under the Other Calculations tab on the Overview screen. For details see .

Output: Income Statement

BVX® prepares all financial statements using conventional accounting standards. They are prepared with cash flow perspective, rather than with earnings perspective. For example, BVX® shows tax depreciation rather than book depreciation used for financial reporting.

Output schedules are calculated using inputs from the Overview screen. To change Output schedules, one must change inputs. 

Sales and EBITDA projections are based on inputs in and .

All interest expenses are calculated based on the opening amount on the balance sheet for each item.

Depreciation line item includes depreciation on the purchased assets as well as the one new acquired assets. For details see . 

Non-compete and Personal Goodwill are amortized over 15 years and are expensed. These are non-cash expenses. The amortization period cannot be changed. The payments for non-compete and personal goodwill are made over a period specified by the user and are shown in . Payments affect cash flow, the amortization affects the income statement.

Consulting payments are expensed as they are made over a period specified in . The pre-paid portion of consulting, even though paid at closing, is expensed over the same period.

Earn-out payments are expensed if the input is for expensing them. Otherwise, they are deducted from cash flow.

Buyer's acquisition expenses are capitalized and then amortized i.e. expensed over 5 years. The 5 years amortization period cannot be changed.

Goodwill is amortized and expensed in an Asset purchase over 15 years. In Stock purchase goodwill is held constant on the balance sheet and is not amortized.

Total Other Expenses are all the expenses below the EBITDA. 

Taxable Income is EBITDA minus Total Other Expenses.

BVX® pays corporate level tax on Taxable Income. For S Corp. it only pays the State tax, and for C Corp. it pays both the Federal and the State Taxes. State taxes are based on Taxable Income. Federal taxes are based in Taxable Income less State taxes. BVX® does not pay taxes if there are losses. BVX® pays taxes in subsequent years when taxable income exceeds prior losses.

Output: Cash Flow Projection

BVX prepares all financial statements using conventional accounting standards. They are prepared with cash flow perspective, rather than with earnings perspective. For example, BVX shows tax depreciation rather than book depreciation used for financial reporting.

Output schedules are calculated using inputs from the Overview screen. To change Output schedules, one must change inputs.

The top portion of the Cash Flow schedule shows mostly conventional line items. It consists of Net Income, non-cash expenses, working capital changes, pay down of revolver if working capital reduces, all the note payments, etc. 

Cash Flow schedule shows remaining Non-compete and Personal Goodwill payments. Non-compete and Personal Goodwill can be paid all up-front at closing, or a portion can be paid at closing and the remaining over time. If they are paid up-front then there are no future payments. Otherwise, Cash Flow schedule shows the remaining payments. (Note: Payment schedule on these items does not affect their amortization on the Income Statement). 

Cash Flow schedule shows payments for capital expenditures. It also shows the amount that borrowed against the capital expenditures and the payments of this new borrowed money. BVX assumes that the capital expenditures occur at the beginning of the year.

Earn-out payments reduce cash flow if earn-out is an adjustment to purchase price. In this case, purchase price is adjusted by increasing the goodwill. This increase in goodwill is amortized over 15 years in an Asset purchase. If earn-out is an expense, then it does not show up in cash Flow; it shows up in Income Statement.

BVX distributes taxes to cover personal tax liability of the shareholder in case of an S Corp.

Operating Cash Flow-Total: This is more or less equal to the conventional Cash Flow from Operations, Cash Flow from Investment Activities and Cash Flow from Financing.

Cash Surplus/Deficit: This is the cash balance before borrowing against the credit line. To determine this amount BVX adds the beginning cash balance and the operating cash flow determined above. Then, it subtracts operating cash requirements (this amount is equal to the of the prior year multiplied by the sales growth plus ) and cash reserves (this amount is equal to the % entered in multiplied by the respective EBITDA).

Availability: Credit Line: This is the amount that can be borrowed against the A/R and Inventory in excess of what has already been borrowed. 

New Borrowing: BVX uses the available credit line ONLY IF it helps maximize the purchase price. In most situations BVX will fully utilize the credit line in Year-1 (exceptions are when BVX Cash Flow is allowed to be positive in Year-1. They are described in ). In subsequent years the business does not need to borrow against the credit line because business generates positive Operating Cash Flow described above. 

BVX Cash Flow is the sum of Cash Surplus/Deficit and the New Borrowing. Deal Optimizer™ keeps iterating until BVX Cash Flow meets the requirements described in . 

How to make best use of BVX Cash Flow? In general BVX distributes this cash flow keeping in mind seller's objective of maximum price, but also keeping mind buyer's objectives of complying with lender covenants and maintaining operational flexibility for unforeseen capital needs. To this end, BVX first requires the buyer to contribute additional capital if BVX Cash Flow is negative. If it is positive, then it distributes it as dividend, only if permitted (dividend distribution is the best use of the cash flow from seller view; however, rarely would a lender permit it). Then, the cash flow is distributed by default , which can be modified in . The default sequence is the one normally observed in the market place where the Over Advance Loan is paid of first, then the Revolver, then the Term Loan, then the loan on new Capital Expenditures, and then the Gap (Seller) Note. If there is cash flow left after satisfying all debt obligations, then BVX automatically distributes it as dividend; because, in absence of any debt obligations, there is no reason for the cash to be retained in the business; at least from the viewpoint of the seller, who wants the maximum price.

Cash Flow Statement: This cash flow statements is presented in an accounting format. 

Output: Balance Sheet

BVX prepares all financial statements using conventional accounting standards. They are prepared with cash flow perspective, rather than with earnings perspective. For example,

1) BVX shows tax depreciation rather than book depreciation used for financial reporting,

2) Consulting agreements are normally not shown on the financial statements, but BVX does. 

Output schedules are calculated using inputs from the Overview screen. To change Output schedules, one must change inputs.

"Purchase" column shows input data from . Fixed Assets are shown at Book value.

"Opening" column shows buyer's opening balance sheet. It is calculated as follows. 1) First Total Liabilities and Equity (TLE) is calculated. TLE equals Purchase Price, plus A/P & Accrued, plus Acquisition Expenses. 2) Then, TLE is funded by debt per . 3) Then, TLE is allocated to the assets per the value of the assets in the "Purchase" column, and to non-compete, personal goodwill, consulting, and to acquisition expenses. The difference between TLE and the amount allocated to the assets in the previous sentence is allocated to goodwill, which can be positive or negative. Fixed Assets are allocated Book value for a Stock purchase, and Fair Market Value for an Asset purchase.

For years 1 through 5, balance sheet is calculated using conventional accounting standards. Few significant points are 1) A/R, Inventory, A/P are changed in proportion to Sales, or disproportionately if user has provided such input in . 2) Cash line item contains , and . Operating Cash changes in proportion to Sales, Cash Reserves change in proportion to EBITDA and Excess Cash is held constant. 3) Other Misc. Assets and Other Misc. Liabilities are held constant for all the five years.

Output: Buyer ROE

BVX follows conventional definition of ROE. However, what traditional methods call an "After-tax ROE", BVX calls it a "Pre-tax ROE". (See ).

BVX calculates ROE using Discounted Cash Flow (DCF) method. It applies DCF technique to cash flow that is actually delivered to the equity investor. And it is based on investor's actual post-acquisition debt structure, deal structure, price allocation and dividend policy (See ). BVX does not discount free cash flow as done in traditional valuation because a) Most people calculate free cash flow before servicing debt principal and b) eve if free cash flow is calculated after debt service, such free cash flow is generally cannot be distributed as dividend due to lender covenants.

BVX does not use the capitalization approach to calculate the Terminal Value. Instead Terminal Value equals 5th year EBITDA times Exit Multiple, where Exit Multiple is either entered by the user or is automatically calculated by BVX. (See ). 

In addition, BVX discounts Liquidation Proceeds, not the Terminal Value. To Terminal Value, BVX adds non-operating assets, deducts non-operating liabilities, deducts selling expenses, deducts corporate level taxes in an Asset sale, steps-up S Corp. retained earning to pre-tax, and deducts payments to mezzanine lender's equity. 

Buyer's ROE

- Original Equity Investments is Purchase Price times Buyer Equity.

- Selling Price @ Exit is 5th year EBITDA times Exit Multiple

- Cash retained on sale is Excess Cash plus the Cash Reserves. BVX considers these more buyer-specific than business-specific. On the other hand, Operating Cash component of Cash on the balance sheet is considered business-specific and hence not retained on sale. 

- Closing Cost is Terminal Value times % entered in .

- Corporate taxes are paid on gain in an Asset sale. ( permit disabling corporate tax deduction). Note: This presumes that there is no recapture gain on fixed assets in an Asset sale.

- Non-operating liabilities are the ones shown on the balance sheet.

- Pre-Tax Proceeds from Sale (This is used for Mezzanine ROE calculation) equals Terminal Value plus cash retained, less closing costs, corporate level taxes and non-operating liabilities. 

- Tax distribution to S-Shareholder does not impact ROE because such taxes are passed through to taxing authorities.

- Additional contributions to cover losses are considered equity infusion and are part of the ROE calculation. It is assumed that all of the additional contribution will come from the primary equity holder, and none from the mezzanine lender, even though the mezzanine lender may own some equity interest. 

- Annual dividend distributions are part of the ROE calculation. For S Corp. dividend distribution, in excess of covering S-Shareholder taxes, is stepped-up to pre-tax level. ( permit disabling this step-up). It is assumed that all of the dividends go to the primary equity holder and none to the mezzanine lender, even though the mezzanine lender may own some equity interest.

- Mezzanine Loan Balloon Payment (See Mezzanine ROI below).

Mezzanine ROI

- Mezzanine Loan is the original amount of mezzanine borrowing.

- Interest - Mezzanine are the interest payments on the mezzanine loan at the expected current return by the mezzanine lender.

- Mezzanine Loan Payments are the principal payments if the mezzanine loan is amortized.

- Mezzanine Loan Balloon Payment is the sum of 1) unpaid mezzanine principal and 2) mezzanine lender's share of the proceeds at liquidation, which equals mezzanine lender's equity/warrants multiplied by the Pre-tax Proceeds from sale (defined above) plus the gross-up of retained earnings if the entity is an S Corp. 

- Conceptually BVX treats mezzanine equity/warrants as a zero cost option to buy equity i.e. the mezzanine lender has the rights to receive equity upon liquidation at zero cost. Thus, the mezzanine lender technically does not own equity during the planning horizon and hence does contribute additional equity to cover losses, nor does he get annual dividends. However, the mezzanine lender does get a share of the proceeds on liquidation when such equity/warrants option is exercised.

Output: Other Calculations

Bank Loan Details 

        This section shows the amount borrowed against various assets. BVX borrows 100% of the Mezzanine loan, but it borrows against other assets only if needed. For RE Loan see .

Sources of Funds

        This section shows all sources of funds. Most items are per user input. Buyer Equity is the one decided by BVX when Deal Optimizer™ is used or the one entered by the user when Deal Quantifier™ is used. Gap (Seller) Note is equal to Purchase Price, plus Acquisition Expenses, minus the total of all other financing. Consulting payments are valued at their Present Value (PV) determined using interest rate entered in . Total Consideration equals Total Sources of Funds plus assumed A/P liabilities. 

Uses of Funds 

        This section shows all uses of funds. Most items are per user input. Cash Down Payment equals Buyer Equity, plus Bank Loans, minus Acquisition Expenses. Gap (Seller) Note is equal to Purchase Price, plus Acquisition Expenses, minus the total of all other financing. Consulting payments are valued at their Present Value (PV) determined using interest rate entered in . Acquisition Expenses are Purchase Price times the % entered in . 

Purchase Price Allocation

        "Total Consideration: Balance Sheet" is equal to Total Liabilities and Equity (TLE) and is allocated as described in . "Total Consideration: Balance Sheet" is the gross value of total consideration and  "Total Consideration" is the PV of total consideration. The difference is equal to the gross value of consulting and its PV, and it arises because BVX records consulting payments at their gross value on the balance sheet for simplicity. 

Output: Financial Ratios

It appears that lenders do not have a standard definition of financial ratios. Hence, BVX provides few pre-defined ratios and allows the user to create their own ratios.

User can define the numerator 6 different ways (2 are pre-defined) by selecting any combination of 7 parameters (like EBITDA, Cap Ex, Depreciation, etc.) that can be included in defining the numerator.

User can define the denominator 6 different ways (2 are pre-defined) by selecting any combination of 10 parameters (like Revolver, Term Loan, Gap (Seller) Note, Over Advance Loan, etc.) that can be included in defining the denominator.

Once the numerator and the denominator have been defined, user can define 5 ratios (2 are pre-defined) by selecting any of the 6 numerator and 6 denominator definitions. Each of the 5 ratios is displayed as Interest Coverage ratios and Debt Coverage ratios.

In addition, BVX shows Current Ratio, Quick Ratio, Total Debt/Equity Ratio, Sr. Debt/EBITDA Ratio, etc.

Output: Real Estate Financials

Output: Depreciation Schedule

- This schedule shows depreciation for old fixed assets and new fixed assets. It also shows annual capital expenditures borrowing and payments.

- Depreciation factor is from either inputs or from .

- Capital Expenditures borrowing and payment schedule is based on inputs in and  .