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Deal Structure and Cash Flow Analysis

One of the main questions advisors have when evaluating a transaction is – how will this deal affect me financially? Often times the answer to this question rests in the terms of the deal and the cash flows that result from the transaction. Raymond James has developed a deal calculator that helps you determine an appropriate deal structure and analyze the resulting cash flows after expenses, acquisition debt, owner compensation, and broker/dealer override (if any).

Below are the basic steps for completing the deal calculator:

  1. Enter Summary information such as the price of the practice being acquired ($), total gross practice revenues ($), and projected growth rate (%).
  2. Enter the Deal Structure in percentages. These should total to 100%.
  3. The third step is to enter the Terms of the Deal based on the Structure. If you have structured an earn-out as part of the deal you will need to enter the annual percentage earn-out payment and the number of years the earn-out will cover.

    If you have structured the deal to include a promissory note payment you will need to include the interest rate on the note and the number of years covered by the promissory note. For purpose of this analysis we assume the payments are made annually.

    If you have borrowed the up-front (down payment) portion of the transaction you should enter the annual interest rate of the loan and the number of years covering the payout.

  4. Under the Income Statement Assumptions you will need to estimate three types of expenses that will impact the profitability or cash flow of the acquisition target. The first step is to estimate the percentage override your broker/dealer will subtract from the Total Gross Revenues entered in Step 1. If you have used a Net Revenues (Practice Revenues after broker/dealer payout) then you can enter 0%.

    The next assumption is to estimate the total direct expenses the practice will incur. These Direct Expenses should include the owner’s base compensation and professional salaries. Generally speaking these expenses range from 45-50%.

    The last assumption to enter under the Income Statement is for General & Administrative Expenses. This estimate should include all other expenses the practice will incur such as salaries, benefits, taxes, rent, technology, marketing, etc. Generally speaking these operating expenses range from 38-45% with the best managed firms generating 35%.

  5. Once you have entered in all the data you are ready to calculate your Cash Flow Projections. Click the "Calculate" button to generate your annualized cash flow statement and acquisition cost summary.
Please do not enter percentile or dollar signs. 
Aquisition Price    $
Total gross revenues    $
Projected revenue growth rate    %

   Deal Structure
Down payment percentage    %
Earn-out percentage    %
Promissory note percentage    %

   Terms of the Deal

   Earn-out Component
Annual earn-out percentage - approximate amount paid in first year    %
Length of earn-out in years    

   Promissory Note Component
Interest rate on note    %
Length of promissory note in years    

   Up-Front Loan Component
Interest rate on loan    %
Length of payout in years    

   Income statement assumptions
Less: broker/dealer override on revenue stream    %
Less: direct expenses (owner compensation and professional salaries)    %
Less: general & administrative expenses    %