An Industry Overview, Basic vs. Standard Level LBO Modeling Test, Before We Begin … Download the Excel Template Below, Step 3. Essentially, we’re talking about the equity waterfall, which is the division of equity proceeds amongst all the different equity holders. The use of debt, which normally has a lower cost of capital than equity, serves to … The list below is a high-level explanation of the different types of debt instruments that are commonly used in LBO transactions. Revenue = Prior Revenue × (1 + Revenue Growth %), Gross Profit = Gross Margin % Assumption × Revenue, Cost of Goods Sold (“COGS”) = Gross Profit – Revenue, SG&A = SG&A % of Revenue Assumption × Revenue, D&A = D&A % of Revenue Assumption × Revenue, EBIT = EBITDA – D&A – Intangible Assets Write-Up Amortization – PP&E Write-Up Depreciation – Monitoring Fees, Amortization of Financing Fees = Total Financing Fees ÷ Financing Fees Amortization Period, Step Function: Previous Cell Amount + Fixed Step Amount. The LBO modeling test we’ll go through here reflects the level of difficulty that all candidates should expect to encounter during most interviews. The course will focus on building a debt waterfall and developing an advanced LBO model from scratch with NewCo/ OpCo consolidation and integrated consolidated financial forecasts. Get Business Valuation Expert Financial Plan. OUR WEBINAR PLATFORM . Background : 2nd year IB analyst, keen to lateral to Rx and distressed space. In 2025, the gross margin should be 32.5%. The Debt Schedule is probably the trickiest part of the LBO model to build—especially for anyone who has not built an LBO model before. Who should attend? 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). 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. Le LBO offre égalementvantagesdes a par rapport à d’autres formes de financement (comme par exemple l’introduction en bourse) : son mode de gouvernance, sa capacité à supporter des entreprises matures tout au long de processus de restructuration, sa stabilité face Moving onto the transaction assumptions, the transaction fees were $10mm, Cash to B/S is $5mm, financing fees amortization period is 7 years, and the tax rate to be used is 35%. En pratique, cela ne devrait poser que peu de difficultés d’adaptation, les règlements de fonds de private equity contenant usuellement de tels mécanismes. retirement, divorce, death in the family, career change), but for the most part – a management team that intends to stay on and believes in the growth trajectory pitched in the sell-side marketing (i.e. While PIK is non-cash, it is included as part of the total interest expense calculation under accrual accounting. The one new line item included is “Rollover Equity %”, which amounts to 20% as given by the prompt. 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. To finish the model assumptions section, the remaining portion is the debt assumptions table that lays out the terms of the various debt instruments used. During this one-day course, you will construct a debt cash flow model in the context of an LBO transaction. Debt covenant analysis. A cash sweep refers to the optional paydown of the principal when there is excess free cash flow remaining. For 2020A, we can see the gross margin is 31.5%, SG&A is 21.0% of revenue, R&D is 3.5% of revenue, and D&A is 1.4% of revenue. Secured Debt. Template M&A Model that Demonstrates Consolidation Analysis with Pro-Forma Balance Sheet and Accretion/Dilution . The capitalized financing fees will be shown as a negative $8mm in the PF year, and the Amortization of Financing Fees will be added to the balance each year. Our live virtual learning webinars are hosted on … It’s important to recognize that this inconsistency stems from how we treat operating cash in the LBO. The revalued tangible assets serve as a new basis for the depreciation & amortization expense, which are amortized over their expected useful lives. PIK interest is a form of non-cash payment – rather than being an actual cash outflow, the interest expense instead accrues to the ending debt balance. If you forgot how to do this, check out our guide on data tables for sensitivity analysis. The fundamental equation of PPA sets the assets acquired and liabilities assumed equal to the value of the consideration paid before making the necessary adjustments. Allocable Purchase Premium = Purchase Equity Value – Book Value of Equity + Existing Goodwill, Pro Forma Goodwill = Allocable Purchase Premium – Intangible Assets Write-Up – PP&E Write-Up + Deferred Tax Liability, Deferred Tax Liability (DTL) = Write-Up Amount x Tax Rate %, Intangible Asset Write-Up = Intangible Assets Allocation % x Allocable Purchase Premium, PP&E Write-Up = PP&E Write-Up % x LTM PP&E, Annual Incremental Depreciation = PP&E Write-Up ÷ Useful Life Assumption, Annual Incremental Amortization = Intangible Assets Write-Up ÷ Useful Life Assumption, Annual Unwind of DTL = Deferred Tax Liability Created ÷ Useful Life Assumption. If you need a refresher on how to forecast the B/S items, read our quick reference guide. Net Debt Total Interest Expense Sponsor Equity Purchase Equity Fees Net Income Rate Uses Financing Fees Sources Total Debt Illustrative LBO Analysis x Transaction Assumptions ($ in millions, except where otherwise specified) Sources & Uses $ % Cash On-Hand Revolver Draw Senior Notes Subordinated Notes Management Rollover Total Sources Refinance Existing Debt … 3 tiers, the 2nd is one is what is tripping me up when I try to stress test it. With the income statement and cash flow statement complete, we can fill out the balance sheet. Overview of LBO Debt Financing . But rather, the associate is confirming the instructions were correctly followed. As shown in the graphic below, interest expense in the debt schedule flows into the income statement Income Statement The Income Statement is one of a company's core financial statements that shows their profit and … There are obvious exceptions to this rule (e.g. Waterfall Model – Hurdle 2 Waterfall Model – Hurdle 3. To break this amount out by tranche: Revolver and Term Loan B are priced at a floating rate of “LIBOR + 400” with the TLB having a floor of 2%. But once LIBOR increases above 200 bps, the interest rate becomes 6.3% in 2024 and then 6.5% in 2025. Purchase Price Allocation (“PPA”), For more comprehensive training, we have developed a step-by-step program. descending from highest seniority to lowest in the capital structure). Preferred stock is senior to common equity, so if the deal goes sour, the sponsor would be paid in full before the management team. In order to keep … During this one-day course, you will construct a debt cash flow model in the context of an LBO transaction. Next, we will forecast the cash flow statement. In the last twelve months, JoeCo generated $715mm in revenue and $50mm in EBITDA. OUR WEBINAR PLATFORM . For example, for a five-year holding period – confirm that the PE firm received five $2mm payments in total. Upon purchase, you will gain immediate access to the most comprehensive course on LBO Modeling available. The preferred stock is convertible to common stock. 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. Finally, we will also look at modelling a leveraged recapitalisation and the benefits obtained from undertaking this. Five year business valuation expert financial model excel template for fundraising and business planning for startups and entrepreneurs. During this one-day course delegates will construct a debt cash flow model in the context of an LBO transaction. However, JoeCo is a private company being acquired by a financial buyer. For the cash flow from investing activities section, the only line item is Capex, which will be 2% of revenue each year. While the additional depreciation stemming from the PP&E write-up and the amortization of intangibles are deductible for book purposes, they are not deductible for tax purposes. Recall that we skipped over the interest expense line item on the income statement, therefore we will link the ending interest expense balances to the relevant cells on the I/S. 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. Designed for investment banking and private equity professionals who want to take their LBO modeling skills to the next level. Next, we will project revenue since most of the line items will be projected off revenue. As mentioned earlier, PIK interest is a non-cash payment that accrues over time. What you will gain . multiply the beginning balance by 1.04 each year to see the next year beginning balance). contracts) can be revalued and written-up in value. The reason being, we skipped over the change in NWC on the CFS. To calculate the deferred tax liability created from the intangible assets write-up, we will multiply the $49mm write-up by the tax rate of 35% to get $17mm. The beginning balance of $175mm has decreased to $86mm by the end of 2025. Full 3-Statement Build Therefore, a new line item, called “Deferred Tax Liability” will show up on the balance sheet to offset this temporary tax discrepancy. A new line item in the TLB roll-forward is the “Less: Cash Sweep”. Now moving onto the long-term assets, PP&E will be calculated as the prior balance plus Capex minus D&A and PP&E Write-Up Depreciation. It is not as detailed as Bryan's, as in my model I did not provide total expenses in a term sheet format, nor did I take financing into account (no equity accrual, debt payoff, etc - cash only deal). In the Basic LBO Modeling Test, we introduced the core mechanisms of a LBO model such as the Sources & Uses table, the free cash flow build, a simplistic debt schedule (e.g. Then, on the debits side we will link to the Cash to B/S from the Sources & Uses schedule (+$5mm). 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. Thus, we will divide the $8mm by 7 to get roughly ~$1mm in amortization each year. Finance professionals who need to create, analyse and interpret simple debt cash flow models. Moving onto the liabilities side, the first adjustment is the elimination of the $100mm in existing debt on the debits side (-$100m). Next, the Cash to B/S is $5mm, this means JoeCo’s cash balance cannot dip below this pre-determined level post-closing and thereby increases the amount in funding required. The rationale behind why we wipe out the existing equity shareholder value and goodwill will make more sense later when we walk through the closing B/S. However, a lackluster submission may be the reason you don’t receive an offer. Starting on the “Uses” side, we have already calculated the purchase price as $625mm and can link to the relevant “Purchase Enterprise Value” cell. Quick question on the roll over shouldn’t the formula be 20%x(Purchase Enterprise Value) as the management is re-investing 20% of the proceeds from the initial sales (assuming they owned 100% of the target)? Within secured debt, there is the first lien debt, which is the highest-ranking debt. And the repayment method is a bit different than other debts. However, take note of how the ending cash balance never dips below $5mm in the cash roll-forward. Therefore, the subsequent step is to multiply the 20% rollover equity assumption by the $348mm in required equity to get $70mm as the amount rolled over by the management team into the new, post-LBO entity. 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). For the working capital assets, accounts receivable will be a function of Days Sales Outstanding (DSO), inventory will be based on Days Inventory Held (DIH), and prepaid expenses will be forecasted as a percentage of revenue. At this stage, the balance check will show the balance sheet is not in balance. Just make sure all the add-backs are shown as positives. When creating the debt schedule, we will go through each debt tranche in accordance with the waterfall logic (i.e. If done correctly, the cash flow after financing activities should be zero in all the years. Capex increases the PP&E balance). If the revolver left undrawn the entire projection period, the unused commitment fee is $0.2mm each year. 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. The Leveraged Buyout (LBO) Model forecasts future equity value and IRR while analyzing a target business for acquisition using an LBO structure. If not, it is likely an error related to the debits and credits signs. The final debt tranche is the subordinated notes, in which $50mm was raised. PP&E). So, not only will the principal payment due at maturity be of larger magnitude, the cash interest expense paid each year will be higher. From the perspective of JoeCo, opting for PIK will conserve cash in the current period and will be a non-cash add-back on the cash flow statement. 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. In each scenario the sources of funds must equal the uses of funds. Can the asset be operated without this team? 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. This debt stands after senior debt and unsecured debt. 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. Shareholders’ equity will be calculated as the prior balance plus net income since there were no dividends paid out. An LBO sponsor can have done everything correctly and have a firm primed and ready for an IPO only to find that the IPO market is soft due to prevailing market conditions. Highlight the table you have just set up and press “Alt + D + T”. Thank you! We have now calculated the write-up amounts and the associated depreciation / amortization expenses, but the tax implications must not be forgotten. 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. Starting with the debt tranches, we can just link the debt amounts from the debt assumptions table where we have already calculated the amounts raised based on the turns of EBITDA. To finish the Uses side of the table, the transaction fees were $10mm while the financing fees were $8mm as previously calculated. For the long-term liabilities, the Term Loan B, Senior Notes, and Subordinated Notes will all be pulled from the ending balance from the debt schedule. For investment banking analysts, you’ll likely not see a lot of these as it’s usually assumed you have this down. A standard 80 / 20 distribution waterfall for equity proceeds. Given the existing management team has rolled over 20% equity, we must calculate the amount of the rollover in dollar terms. 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. As a reminder, the interest rate is 12.5% with 8.5% being paid-in-cash and a 4% PIK rate. Specific to this LBO of JoeCo, deferred tax liabilities (DTLs) are created from the PP&E and intangible assets being written-up. All that remains now is the cash flow from financing section, which we will return to once the debt schedule has been completed. The amortization of financing fees has been calculated as $8mm and will be amortized over 7 years. 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. The course will focus on building a debt waterfall and developing an advanced LBO model from scratch with NewCo/ OpCo consolidation and integrated consolidated financial forecasts. 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. JoeCo’s LTM EBITDA is $50mm and the entry multiple paid was 12.5x – thus, the purchase enterprise value is $625mm. Here’s how it works. The Advanced LBO Modeling Program bridges the gap between academics and the real world to equip students with the practical financial skill set that they will need in private equity and leveraged finance. Would the sponsor do the deal without this team? If the deal goes well, the sponsor can convert its preferred stock to common stock and share in the upside. In this example, the prompt mentioned two adjustments that will impact the goodwill created in this transaction: 1) Intangible Assets Write-up and 2) PP&E Write-up. And I also have access to Reorg research and downloaded their waterfall models which I have to say they are good quality. As the exit value increases (successful deal), management gets a bigger piece of the pie. Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Revenue) × 365, Days Inventory Held (DIH) = (Inventory ÷ COGS) × 365, Prepaid Expenses % of Revenue = Prepaid Expenses ÷ Revenue, Days Payables Outstanding (DPO) = (Accounts Payable ÷ COGS) × 365, Accrued Liabilities % of Revenue = Accrued Liabilities ÷ Revenue, Deferred Revenue % of Revenue = Deferred Revenue ÷ Revenue, Cash: Ending Cash Balance from Cash Roll-Forward on CFS, Accounts Receivable = (DSO × Revenue) ÷ 365, Prepaid Expenses = Prepaid Expenses % of Revenue × Revenue, PP&E = Prior PP&E Balance + Capex – D&A – PP&E Write-Up Depreciation, Intangible Assets = Prior Intangible Assets Balance – Intangible Assets Write-Up Amortization, Accrued Liabilities = Accrued Liabilities % of Revenue × Revenue, Deferred Revenue = Deferred Revenue % of Revenue × Revenue, All Debt Tranches (TLB, Senior Notes, Sub Notes): Ending Balance from Debt Schedule, Capitalized Financing Fees = Prior Capitalized Financing Fees – Amortization of Financing Fees, Deferred Tax Liability = Prior DTL – Deferred Tax Liability Unwind, Net Working Capital = Current Assets – Current Liabilities. 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