a-Z-Boy acquired an online furniture retailer called Joybird on July 30, 2018.
La-Z-Boy’s accounting for this acquisition has several twists you might not have seen before:
- An earnout
- Assumption of a liability
- A working capital adjustment
Note: Amounts above are in thousands.
Do you see the earnout in the table above?
This is additional money La-Z-Boy has promised to pay Joybird’s shareholders if Joybird hits certain sales and profit targets in fiscal years 2021 and 2023.
If Joybird does really well in those two years, La-Z-Boy could pay as much as $65 million more for Joybird. But if Joybird doesn’t do so well, the earnouts might only be worth a few million (or nothing at all).
Thus, La-Z-Boy didn’t know the total price it would be paying for Joybird on the date of the acquisition.
But it needed to estimate how much the earnout was worth to calculate the purchase price (and hence the goodwill) so it estimated the earnouts to be worth $7.5 million.
Now do you see the line that says “assumption of liability”?
This is listed as part of the consideration La-Z-Boy is giving to Joybird’s shareholders, but it doesn’t represent cash La-Z-Boy is paying. Instead, this refers to $5 million of debt that La-Z-Boy is taking over (this could be debt that Joybird’s founders took out for the company, such as a mortgage for the company’s headquarters). Because La-Z-Boy is assuming responsibility for this debt, it is treated as part of the price La-Z-Boy is paying (it’s like La-Z-Boy paid their debt for them).
Finally, do you see the line that says “working capital adjustment”?
When La-Z-Boy initially agreed to acquire Joybird, the two companies agreed that Joybird would have a certain level of working capital when the acquisition became official. But working capital fluctuates on a daily basis, and Joybird was $2.486 million short of the target level of working capital on the acquisition date.
Thus, it is assumed that La-Z-Boy will need to infuse $2.486 million into Joybird as working capital; as a result, $2.486 million is deducted from the amount that La-Z-Boy must pay to Joybird’s shareholders. This is called a “working capital adjustment” because the acquirer is adjusting its purchase price because the working capital was higher or lower than the amount the two companies had agreed upon.
Here’s a link to La-Z-Boy’s 10-K (the details of the Joybird acquisition are on page 52):