LBO Modelling of Auto Retail
Hi fellow monkeys -
Apologies for the standard question but have been working on a case in which they operate in the auto retail industry. The target in question has a trade and non-trade note payable account for their floor plan (i.e. they put up a deposit and get short-term financing for the vehicles on their floor at the dealerships).
They earn interest income on this (for amount of deposit), but is also considered debt-like given it's a note. My question on hand is as follows:
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The non-trade note payable, I believe this should not be in working capital and considered debt-like so net debt.
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Trade note payable (floor plan) - this is where I am getting some slight conflictions. Given it's a note, I want to treat as a net debt item and back out of terminal value, gets rolled over at close, etc. However, considering the nature behind this (to effectively secure inventory), I can see it being argued as a working capital item.
Any thoughts and comments on this would be appreciated.
(side note: if anyone knows how to treat financing and operating leases on the BS - that would be helpful too lol)
less bananas more input pls - i am full but lost monkey (also realized i wrote TV when I meant EV)
Yeah non-trade note is a debt item.
For the floor plan financing you can argue either way (its being used for inventory as you say). If you are analysing wokring capital efficiency or something else I would put it in WC for this purpose. But for valo, would treat as debt.
For the point at the end on lease accounting - depends which framework you are under. IFRS 16 moved operating leases on BS as ROU assets / lease liabilities. So you get a depreciation charge and a interest cost.
Remember if there are significant lease liabilities and you are doing a multiples comparison with a comps set, make sure to make the relevant IFRS 16 adjustments so that your comparison is like for like.
Not sure it really makes sense to treat as WC? A note against WC is just debt secured by inventory? Not that different from a RCF secured against inventory?
yeah I agree - I was saying that If analyzing the operational cash flow or working capital efficiency, you might include floor plan payables in working capital. - but for most purposes and in this valo case, call it revoler.
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