starting with the most senior tranche), calculate the cash flow available to capital and the interest and principal repayments possible, maintaining a non-negative cash balance--> need to link carefully to LBO Model – Returns sheet here • Include calculation of preferred dividends after debt • May pay common … If done correctly, you should have 10.0% as the growth rate in 2025. But rather, the associate is confirming the instructions were correctly followed. The first adjustment will be wiping out the entire cash balance on the credits side (-$50mm) since this deal was done on a CFDF basis. The implication being, the management not only has an incentive to meet their financial targets, but they actually have something tangible to lose. Assuming the private equity firm exits at the same multiple as entry after a five-year horizon, the, To achieve a 3.0x MOIC in five years, the private equity firm, If the minimum IRR threshold is 15.0%, the lowest exit multiple that the private equity firm could exit at. The appearance of the “Sources” side of the table and the calculations will be slightly different because of the additional source of equity funding, the management rollover. A few days ago, I downloaded the "Simple Waterfall Model - Private Equity" spreadsheet in the files vault section, that was created by Bryan Hancock.First wanted to say thanks it s a great spreadsheet. Now that the transaction structure has been set up, the next step is to create the closing balance sheet, which refers to the pro forma balance sheet after the deal adjustments have been accounted for. In each scenario the sources of funds must equal the uses of funds. This is the residual amount of equity necessary, but the key distinction is that the private equity firm did not purchase 100% of JoeCo’s equity. We will look at the following example where we have two investor groups, Promoters and Limited Partners, which jointly are invested in a real estate deal with the objective to renovate a commercial property and sell it within 6 years. We are now in the final steps of the modeling test, all that remains is calculating the returns metrics, creating the sensitivity tables, and answering the questions listed in the prompt. The division of proceeds amongst different classes of stock and investors can be as tricky as debt waterfalls (for more on debt waterfalls, check out our Intermediate LBO Guide). If you sum up the 2020A balance with the debit and credit entries, the 2020PF cash balance is $5mm – i.e. To calculate the taxes due, we will multiply the tax rate of 35% by EBT and after subtracting this amount from EBT we have arrived at net income. Therefore, divide LIBOR by 10,000 in the formula. The Paper LBO: Practice Exercises to Ace the Private Equity Interview, Private Equity Interview: Top 25 Most Frequently Asked Technical Questions, Ultimate Guide to Debt & Leveraged Finance, The Impact of Tax Reform on Financial Modeling, Fixed Income Markets Certification (FIMC), Top 25 Private Equity Interview Questions, guide on data tables for sensitivity analysis. The one new line item included is “Rollover Equity %”, which amounts to 20% as given by the prompt. Lower-tiered … Notice the intangible assets balance decreases by ~$3mm each year. To calculate the deferred tax liability created from the PP&E write-up, we will multiply the $17mm write-up by the 35% tax rate to get $6mm. If we multiply the write-up percentage assumption of 10.0% by the purchase premium of $488mm, we get to $49mm as the intangible assets write-up. Now that we have calculated the pro-forma goodwill as $445mm and have the amount in deferred tax liabilities created, we can now put together the closing B/S. Debt covenant analysis. Debt Modelling (with LBO) During this one-day course delegates will construct a debt cash flow model in the context of an LBO transaction. Finally, we will also look at modelling a leveraged recapitalisation and the benefits obtained from undertaking this. What is the implied IRR and MOIC if the PE firm exits JoeCo at the same multiple as entry in a five-year horizon? Secured Debt. So, what are the implications of intangible asset and PP&E write-ups on the creation of goodwill? If not, it is likely an error related to the debits and credits signs. In its simplest form, the pro forma goodwill is calculated as the purchase equity value minus the book value of equity plus the existing goodwill. To confirm you did the sensitivity table correctly, check to make sure that the highest value is on the top right, with the lowest being in the bottom left corner. Moving onto goodwill, the existing goodwill of $28mm will be wiped out on the credits side (-$28mm). Easy LBO; Intermediate LBO; Ability-To-Pay Analysis; LBO Value Creation Analysis; High Level. Basically, the higher amortization expense leads to lower GAAP taxes and JoeCo’s book taxes will be lower than its GAAP cash taxes. This download contains the following structures: Structure 1: Return of Capital + Preferred to LP & GP, Distribution of Excess Proceeds. As we continue to build our debt schedule, the model will become circular because interest expense and preferred dividends reduce net income, which reduces cash flow available for debt repayment, which affects period-end debt balances, which affects average debt balances, which affects interest expense, and so on. An Industry Overview, Basic vs. Standard Level LBO Modeling Test, Before We Begin … Download the Excel Template Below, Step 3. Another reason management rollover is a positive signal is it demonstrates that the management team actually believes in the growth prospects of the business. As a result – the more JoeCo’s intangible assets and PP&E is written up, the less goodwill will have to be created on the date of the transaction. only approximations). Because the instructions are more extensive with more moving pieces, you will be given more time to complete the model – the caveat being, mistakes in your model are penalized more since you were given more time to go back and check your work. Get Business Valuation Expert Financial Plan. Discover how to construct a flexible model capable of analysing the suitability of target businesses for a leveraged buy-out. Since this deal was completed on a “cash-free, debt-free” basis, the purchase price will be equal to the purchase enterprise value. ii. LBO analysis / capital structure / debt waterfall) - oftentimes we get pre-baked operating models from sponsors / clients, or the coverage bankers will be handling the operating model / valuation analysis. Then on the credits side of equity, we will link to the equity contributions from the Sources & Uses table (+$348mm). Purchase Enterprise Value = LTM EBITDA × Entry Multiple, Debt Raised (“$ Amount”) = Debt EBITDA Turns × LTM EBITDA, Financing Fees (“$ Fee”) = Debt Raised × Financing Fee %. For interest, we will leave this section blank for now and return to it once the debt schedule has been completed. If we used zero debt in the transaction, we would have spent $500M in equity capital upfront, and received ~$700M at exit, for a net return of $200M which is a 40% return over 5 years, or an IRR of ~7% annually. A cash sweep refers to the optional paydown of the principal when there is excess free cash flow remaining. Within secured debt, there is the first lien debt, which is the highest-ranking debt. Once that is done, we see the sponsor contribution was $278mm and both sides of the table are now in balance. As we can see on the right side of the debt assumptions table, the financing fee % for all of the tranches of debt (excluding the revolver) is 2.5% – thus, the total financing fees incurred comes out to be $8mm, which will be capitalized and amortized over the 7 year term. To finish the Uses side of the table, the transaction fees were $10mm while the financing fees were $8mm as previously calculated. Thus, we must calculate the NWC (Current Assets –Current Liabilities) and then link the YoY change (previous period NWC – current period NWC) on the cash flow statement. Debt modelling (with LBO) 10 February 2021 Debt modelling (with LBO) Category: MASTER COURSE . This type of schedule is called a corkscrew model and is commonly found in real estate LBO model elements such as debt build-ups, waterfall calculations, and cash flow sweeps To calculate our Amortization and Interest, we need to first pull the 1MO LIBOR curve. Sponsor uses preferred stock with an accruing hurdle rate, Preferred stock converts to common on a 1-1 basis, Management compensation structured with stock options. As mentioned in the prompt, the revolver was left undrawn during the initial purchase date. You’re more likely to see this in the first round if you come from a non-traditional backgrounds. PIK interest is a form of non-cash payment – rather than being an actual cash outflow, the interest expense instead accrues to the ending debt balance. This represents the total value of JoeCo to equity owners, but remember that management rolled over 20%. JoeCo underwent a bankruptcy) is decreased and the returned capital could be invested elsewhere. For instance, we can estimate the lowest exit multiple to achieve an IRR of 15% seems to be between 9.5x and 10.5x from our sensitivity table. Note: Capex will have been entered as a “-“, therefore subtract it in the Excel calculation to have the intended effect (i.e. So, how does the structure of this model differ from the more “basic” LBO Model we covered in the prior post? During this one-day course, you will construct a debt cash flow model in the context of an LBO transaction. This was calculated by taking the purchase premium of $488, subtracting the $49mm in intangible assets write-up and the $17mm in PP&E write-up, and adding the $23mm in deferred tax liabilities. Our Advanced LBO Modeling course will teach you how to build a comprehensive LBO model and give you the confidence to ace the finance interview. During this one-day course, you will construct a debt cash flow model in the context of an LBO transaction. The next debt tranche is Term Loan B, in which $175mm was raised and this will be the beginning balance in 2021 of the roll-forward schedule. For short tests, the prompt is usually written out near the financials in 5-10 bullet points. It is typically used by businesses to construct a cash flow analysis. The percentage assumption for PP&E is 20.0%, but this was stated in terms of a step-up of the existing PP&E balance rather than a percentage of the allocable purchase premium like the intangible assets. The use of debt, which normally has a lower cost of capital than equity, serves to … The beginning balance is $75mm and will remain unchanged throughout the entire holding period. We're sending the requested files to your email now. The preferred stock is convertible to common stock. Thus, a higher D&A expense results in a lower taxable income, which leads to more free cash flow available to paydown debt. If done correctly, the PF closing B/S should balance. With the exception of PIK interest, we have all of the addbacks amounts calculated. To get straight to the point, this revolving credit facility will be drawn from if the free cash flow (pre-revolver) dips below zero and a maximum of $80mm can be borrowed. The revalued tangible assets serve as a new basis for the depreciation & amortization expense, which are amortized over their expected useful lives. Starting on the liabilities side, the revolver line item will be linked to the ending balance from the debt schedule. As mentioned earlier, PIK interest is a non-cash payment that accrues over time. acquisition finance leveraged buyout debt private equity 604 7 add_shopping_cart Total Revolver Capacity: “= ROUND ((Inventory + Accounts Receivable)*75%,-1)”, Beginning Available Revolver Capacity = Total Revolver Capacity – Beginning Balance, Ending Available Revolver Capacity = Beginning Available Capacity – (Revolver Drawdown / Paydown), Revolver Drawdown / (Paydown): “=MIN (Available Revolver Capacity, –MIN (Beginning Revolver Balance, Free Cash Flow Pre-Revolver)”, Ending Revolver Balance = Beginning Revolver Balance + (Revolver Drawdown / Paydown), Revolver Interest Rate: “= MAX (LIBOR, Floor) + Spread”, Revolver Interest Expense: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Revolver Balance), 0) × Revolver Interest Rate, Revolver Unused Commitment Fee: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Available Revolver Capacity), 0) × Unused Commitment Fee %, Term Loan B Mandatory Amortization: “= – MIN (TLB Raised * TLB Mandatory Amortization %, Beginning TLB Balance)”, Term Loan B Cash Sweep: “– MIN (SUM(Beginning TLB Balance, Mandatory Amortization), Post-Revolver Free Cash Flow)”, Ending Term Loan B Balance = Beginning TLB Balance – Mandatory TLB Amortization – Optional Cash Sweep, Term Loan B Interest Rate: “= MAX (Floor, LIBOR / 10000) + (Spread / 10000), Term Loan B Interest Expense: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending TLB Balance), 0) × TLB Interest Rate, Senior Notes = Beginning Senior Notes Balance – Mandatory Amortization, Senior Notes Interest Expense = “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Senior Notes), 0) × Senior Notes Interest Rate, Ending Balance Subordinated Notes = Beginning Balance Sub Notes – Mandatory Amortization + PIK Interest, Sub Notes Cash Interest Expense: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Sub Notes), 0) × Sub Notes Cash Interest Rate, Subordinated Notes PIK Interest Expense = Sub Notes PIK Rate × (Sub Notes Beginning Balance – Mandatory Amortization), Total Interest Expense = Revolver Interest + Unused Commitment Fee + TLB Interest + Senior Notes Interest + Subordinated Notes Interest. Keep in mind that unlike the previous article, we will presume you have a decent understanding of financial modeling best practices and the mechanics of a LBO model – i.e. contracts) can be revalued and written-up in value. OUR WEBINAR PLATFORM . In the absence of such information, or to build the LBO model more quickly, you will want to use the analyst projections for depreciation expense rather than build this detailed depreciation schedule. The list below is a high-level explanation of the different types of debt instruments that are commonly used in LBO transactions. The total deferred tax liability associated with the two write-ups comes out to $23mm. Below is the prompt for the practice exercise: A private equity firm is evaluating a potential leveraged buyout of JoeCo, a privately held coffee company. 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