Question
From: (redacted)
Sent: Monday, May 16, 2005 5:13 PM
To: Verne, B. Michael
Subject: Valuation Question
Dear Mr. Verne
I have two questions for you that I would like to seek clarification on:
I have a client who is inquiring about how operating leases (primarily officeequipment leases) are treated in an acquisition sale. If these leases were soldand were not connected to the sale of an operating unit, they would fall underthe durable goods exception in Rule 802.2(d)(4), and not be reportable. Howeversince they are being sold in connection with the sale of all of the assets of abusiness they are not exempt.
Assuming that the above is correct, the question is raised whether this wouldbe treated as a liability or an asset. My client is worried that if the totalof all of the assets is $52.9 and our total costs in maintaining the operatingleases is $200K yearly, whether this is added to the price, to make it $53.1.(The total sum is likely significantly less, but I'm just using these totalsfor illustration purposes). As I understand these leases are not currentlyreflected as a liability on my client's financials. These leases would probablybe shown as an expense on the financials and not an accrued liability. Myunderstanding is that assumed liabilities would be added to the total purchaseprice to determine the acquisition price, however, this is not an accruedliability, but as I understand only treated as an expense item. Under thesecircumstances should we add these type of leases to the price as if they were aliability, or are they already considered as part of the total price?
The second question 1 have relates to retaining the accounts receivables. Iknow that accounts receivables are generally considered assets and are notexempt for reporting requirements. However, if we have a legitimate businessreason in keeping the receivables and not transferring them as part of thetransaction, will this cause our deal to be suspect if we are close to thethreshold? For instance, we want to keep separate the operations of thebusiness related to commissions earned but unpaid prior to the closing date tooffset keeping all of the liabilities and payables related to operations priorto the closing date. Our client's business generally has a "reversefloat" where our expenses are incurred frequently prior to the paymentsand it can be easily tracked. Clearly payments for services after the closingdate, i.e.., in the form of an earn out would be included, but this is not thesame case.