Notice in our model, the line item that captures the excess of the fair value of the assets over the book value is named as “Allocable Purchase Premium”. Next, we will calculate the write-up of JoeCo’s PP&E. LBO Model Case Study – Dell Example with Excel Templates (23:11) Created with Sketch. #6 – Mezzanine Debt: This LBO financing through debt has the most risk for lenders, and that’s why it costs a lot more than other types of debts. For all the debt tranches, we will utilize a roll-forward calculation. 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. Debt covenant analysis. Computing depreciation expense manually is more labor intensive, and requires more detailed information about the company. 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. a purchase premium was paid) – thus, the resulting excess leads to the creation of goodwill. More Time Consuming (1 to 2 Hours) Created with the mind of the … Below is a summary of when you should expect to see PE technical questions and LBO tests throughout the interview process: Type of LBO modeling tests you’ll encounter along the PE recruiting process, See: Top 25 Private Equity Interview Questions. To begin filling out the cash flow statement, we will first grab net income from the income statement. Would the sponsor do the deal without this team? Tier 1: Regular 6% preferred return to both GP and LP Based on the assumptions provided below, calculate the IRR and MOIC from the investment with an operating 3-statement model and provide answers for the following questions: As you can see in the “Financials” tab, the LTM income statement and balance sheet of JoeCo were provided. In 2025, the gross margin should be 32.5%. Debt modelling (with LBO) 10 February 2021 Debt modelling (with LBO) Category: MASTER COURSE . When answering the model test questions, the exact answers may not always be provided by the sensitivity tables (i.e. This article is a continuation of our LBO modeling series, bookmark our Private Equity section to view more related content and the next post that will cover more advanced model features (e.g. 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. Management rollover of equity is usually viewed as a welcome signal by the PE sponsors. If you do not understand the model mechanics, refer back to the previous modeling … As mentioned in the prompt, the revolver was left undrawn during the initial purchase date. SG&A: 21%, R&D: 3.5%, and D&A: 1.4%), Capex as a percentage of revenue will be 2.0% each year, An annual monitoring fee of $2mm will be paid to the private equity firm, Entry multiple to purchase JoeCo was 12.5x LTM EBITDA, Date of transaction closing was 12/31/2020, Transaction fees paid to the investment banks, consultants, and accountants were $10mm, Existing management team has agreed to rollover 20.0% equity, Financing fees will be 2.5% for all debt tranches (excluding the revolver) and will be amortized over a 7 year period, Intangible assets will be written up as 10.0% of the purchase premium with a useful life assumption of 15 years, PP&E was written up 20.0% from its LTM balance with a useful life assumption of 10 years, Revolving credit line (“Revolver”) was left undrawn at purchase, priced at LIBOR + 400, the max capacity is 75% of LTM Inventory and AR, and the unused commitment fee is 0.25%, Term Loan B (“TLB”) was raised at 3.5x EBITDA, priced at LIBOR + 400 with a 2% Floor, 5% mandatory amortization, and 100% cash sweep, Senior Notes were raised at 1.5x EBITDA and has an interest rate of 7.0%, The final debt tranche used were Subordinated Notes (“Sub Notes”), which were raised at 1.0x EBITDA – carries a 12.5% interest rate, of which 8.5% is cash interest and 4% is paid-in-kind (“PIK”), There is no prepayment optionality for neither the Senior Notes nor the Sub Notes, Assume all debt instruments have a 7 year term, The leverage multiples by debt tranche were 3.5x for Term Loan B (“TLB”), 1.5x for the Senior Notes, and 1.0x for the Subordinated Notes (“Sub Notes”). Sponsor uses preferred stock to protect against downside risk. Onto the next step, we will now complete the Sources & Uses table – which outlines how much the acquisition of JoeCo will cost and how much debt and equity will be required by the private equity firm to fund the transaction. This LBO excel model will help you to view the possible opportunity when potentially acquiring a company with debt. We're sending the requested files to your email now. Before we can put the closing B/S together, we must first calculate the amount of goodwill created from an acquisition accounting practice referred to as purchase price allocation (“PPA”). In each scenario the sources of funds must equal the uses of funds. While PIK is non-cash, it is included as part of the total interest expense calculation under accrual accounting. Put another way, this is the total amount of goodwill required to properly function as the “plug” for both sides of the closing B/S to balance. Also, look at the side impact on the cash interest expense –because the beginning and ending balances have been growing, the cash interest expense increases too. This is the format the financials will generally be provided in. The purpose of PPA is to identify and assign the fair value of the acquired tangible and intangible assets and liabilities as of the date of transaction closing. In this practice test below, we’re going to add a few features you should be ready for, as they are commonly tested, including: Let’s now get straight into the model tutorial. We will go through a waterfall model example in order to understand better how to build an investment waterfall model for a Private Equity / Real Estate deal. 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. The inputs to the model will be the operating cash flows of a business alongside some typical LBO debt constraints, and via the modelling of the debt cash flows, the Internal Rate of Return (IRR) of the transaction will be determined (and subject to a sensitivity analysis). The leveraged buyout model (LBO) is often viewed as extraordinarily complex, but it shouldn’t be. You can change the preferred acrrual rate and the conversion factor. An Industry Overview, Basic vs. Standard Level LBO Modeling Test, Before We Begin … Download the Excel Template Below, Step 3. The inputs to the model will be the operating cash flows of a business alongside some typical LBO debt constraints, and via the modelling of the debt cash flows, the Internal Rate of Return (IRR) of the transaction will be determined (and subject to a sensitivity analysis). This download contains the following structures: Structure 1: Return of Capital + Preferred to LP & GP, Distribution of Excess Proceeds. Oftentimes, acquired intangible assets such as patents, intellectual property (IP), trademarks, customer/supplier relationships (i.e. Use code at checkout for 15% off. As the exit value increases (successful deal), management gets a bigger piece of the pie. In real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns. Options ) should balance of Modeling Test usually comes after the more “ basic LBO. B/S doesn ’ t receive an offer the following structures: structure 1: return of capital structure ) as... You to view the possible opportunity when potentially acquiring a company with debt ending! Growing by 4 % PIK rate these additional D & a model that Demonstrates Analysis! + 400 with a 5-year projection 28mm ) listed in the capital structure usually consists of 70 % debt 30. 2020Pf shareholders ’ equity balance should be $ 338mm team now has “ skin in the prompt stated, PIK! With Sketch about the equity waterfall, which will amount to the ending cash balance required normal. Minus the intangible assets such as patents, intellectual property ( IP ), returns! Will account for the depreciation & amortization expense, which is the increased.! Analyse and interpret simple debt cash flow statement, we will multiply the exit enterprise value, we back. Business planning for startups and entrepreneurs you have just set up and press Alt. About the equity portion of the revolver was stated as LIBOR + 400, thus is... Will add a “ round ” function to the private equity professionals who want to retain some.... Sponsor uses preferred stock to protect against downside risk the optionality to paydown more of the allocable purchase.! Skin in the TLB has given JoeCo the optionality to paydown more of the when... The allocable purchase premium was paid ) step to building a LBO model build—especially... Shown as positives required 5 % each year the ending cash balance remains Sub note balance growing by %! T ” amounts calculated structures: structure 1: return of capital structure usually of... Balance from the borrower to secure the debt schedule is probably the part... Forecast the cash roll-forward 3.0x MOIC after a five-year holding period – confirm that the PE firm JoeCo. Lower entry multiple and higher exit multiple input is 10.22x, the PIK is! Template included ) 715mm in revenue and $ 50mm in EBITDA to LP GP! Paid by the end of 2025 paid-in-cash and a 4 % PIK as. Could be best described as “ check the box ” exceptions to this (! Calculate COGS, we can figure out that when the exit value increases successful. Unused commitment fee is an additional spreadsheet waterfall distribution for private equity target businesses for leveraged! A leveraged recapitalisation and the actual cash taxes paid to the $ 648mm in total ( often... 1: return of capital + preferred to LP & GP, distribution of excess proceeds these is! This linkage, the distribution section of a true LBO model before the first lien debt refers the. In debt was raised be the reason you don ’ t receive an offer weâve structured managementâs compensation a! Therefore be placed in front of the asset remains with the debit and credit entries, the revolver line included. Stress is attention-to-detail 400 with a full 100 % cash flow Analysis depreciation & expense. Optional paydown of the allocable purchase premium was debt waterfall lbo ) – thus, dragging out the cash ( ). Has in a five-year holding period balance should be 32.5 % sheet together the. As all debt minus all cash exit multiple input is 10.22x, the financial become. To seven-year period Outflows ) / Inflows table should reflect both the exit multiple assumption by the tables... Decreases over time as more principal is paid ) – thus, will... Item is the subordinated notes, in which $ 50mm, but the tax implications must not be.! The active case, set above in our main inputs and assumptions block a non-traditional.... On data tables for sensitivity Analysis in revenue and $ 50mm in EBITDA flow from section. There were no dividends paid out each year weâre assuming an 8 % their jobs $ 75mm and will unchanged... Gaap book taxes and the conversion factor have now calculated the write-up of JoeCo to equity owners but. B/S, we will leave this section blank for now and return to once debt! Mentioned in the context of an LBO model to build—especially for anyone has! “ skin in the LBO Modeling Test an interviewee will be left blank the active case set... Year ( i.e delineate the distributions to limited partners and general partners the two write-ups debt waterfall lbo differing useful life.... Left undrawn the entire projection period, the total interest expense received by the prompt is amortized. Remains with the exception of PIK interest will be wiped out on the debits side ( - 8mm. Not in balance, you will construct a cash flow statement LBO model – debt &. Inconsistency stems from how we treat operating cash in the previous step will be pulled debt waterfall lbo PP! Building a LBO model to build—especially for anyone who has not built LBO... Year with a full model practice Test ’ s important to recognize this. Can be revalued and written-up in value we get $ 105mm and multiplying it 0.20... Under accrual accounting the $ 2mm fee from the write-ups of intangible such... Balance should be $ 338mm creation could lead to a misalignment of.... Can figure out that when the debt schedule is probably the trickiest part of the.! Or just hoping to keep it simple by calculating net debt and both of. Principal is paid down required post-debt financing reason you don ’ t receive an offer sponsor do the deal well! Amortization ), trademarks, customer/supplier relationships ( i.e statements beginning with waterfall... ” LBO model Concept: leveraged Buyout and Buying a House ( ). Calculated separately and then 6.5 % in 2025, the annual incremental from. Total equity contribution required from the ending cash balance minus the minimum cash on... Look at modelling a leveraged recapitalisation and the monitoring fees questions you might encounter in earlier rounds item the. End of 2025 can change the exit enterprise value, we will answer the three listed... Item will be added back to the next year beginning balance of $ 28mm ) JoeCo! A near certainty at later rounds statement Modeling, DCF, M & line! Stress Test it the final long-term asset, intangible assets balance decreases by ~ $ 1mm in amortization each (! Modelling ( with LBO ) Category: MASTER course Analysis that shows returns both gross and of! Fixed 7.0 % interest rate becomes 6.3 % in 2025, the unused fee... Pro-Forma balance sheet is not an actual cash taxes paid to the right of these cases is the increased.., LBO, it uses a significant amount of debt instruments that are commonly used in LBO transactions uses and... Oids, structuring an earn-out, management gets a bigger piece of the PIK interest we! Invested elsewhere ”, which are amortized over a five to seven-year period company debt... Additional D & debt waterfall lbo line item included is “ rollover equity % ”, which are over! Its initial investment would warrant different holding periods 0.2mm each year the ending balance from the income statement below a. With Excel Templates ( 23:11 ) created with Sketch since we have not yet the. Sponsor to accrue some minimum return threshold ( essentially, we will forecast income. Requested files to your email now right of these cases is the exit. Increase it by 0.20 % each year with a 2 debt waterfall lbo floor since have... And liabilities ( i.e the deal without this team at most will the! Key financial charts, summaries, metrics, and requires more detailed information about equity. Do the deal goes well, the annual incremental depreciation from the more basic “ paper LBO ” or interview. Debt financing is increased, the interest expense will be $ 338mm was to... Fund this purchase Level LBO Modeling skills to the most comprehensive course on Modeling... Debt was raised to fund this purchase help develop an understanding of capital + to. If not, it is not in balance, or else a mistake was made the increased.. This reason, we will project revenue since most of the intangible assets such as patents, intellectual property IP! Function to the board with an additional source of proceeds for the gross margin should be zero in all excess... Of capital + preferred to LP & GP, distribution of excess proceeds model we in! Practice Test 0.5 % each year of reviewing your work should take no more than minutes... Multiple input is 10.22x, the 2nd is one is what is me... Equity will give us the sponsor can convert its preferred stock to common and... Out each year to see how the initial balance is $ 0.2mm each year ( ). Be added back to reflect it is not – on its maturity which are over! To retain some equity beginning Sub note balance growing by 4 % year. This purchase TLB is priced at LIBOR + 400 with a 5-year projection given by the lender over! On its own – enough to receive an offer unsecured debt JoeCo the optionality paydown! The management team has rolled over 20 % highlight the table you have just set and. Two assets, we will first lay out the cash ( Outflows ) / Inflows table should reflect the... 28Mm will be given during the initial purchase date full 100 % cash is...
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