LBO Modelling

BASIC LBO MODELLING
By
Name Baddila Surya Teja
Roll No. UM21324
Batch MBA BM (21-23)
A private equity firm plans to acquire a private, family-owned widget manufacturer (“W
20% for 12x LTM EBITDA. The transaction will be structured as a cash-free, debt-free de
financing fees will equal 2% of the Purchase Enterprise Value. For simplicity, assume no
The PE firm plans to fund the deal with the following:

• Term Loans: 3x EBITDA with a floating cash coupon rate of Benchmark Rate + 300 bps
principal repayments
• Senior Notes: of 5%,
1x EBITDA 10%,
with 10%,
a 3% 15%,
fixed andcoupon
cash 20% inrate,
Years5%
1 –PIK
5, interest,
and a 50% cash
and no flo
pr
Benchmark Rate is expected to increase from 1.5% to 3.0% over 5 years.
• Subordinated Notes: 1x EBITDA with 10% PIK interest and no principal repayments (m
optional).
Management will also receive a 5% options pool, with an exercise price equal to the PE
The company’s operational profile and forecasts are described below:

• Annual Widget Sales: 4 million units; expected to grow at 10% in Year 1, declining to 6
• Widget Factories and CapEx: 8 current factories; $2 million in Maintenance CapEx per
• Expenses: 50% Gross Margin on widgets declining to 45% by Year 5; fixed expenses sh
• Depreciation: $20 million in the most recent historical year. Use your judgment to for
• Minimum Cash: 5% of the previous year’s sales (use Year 0 sales in the Sources & Use
• Working Capital: Inventory represents 20% of sales, Receivables are 10% of sales, and
• Taxes: Assume a 25% effective tax rate.
with annual sales of $500 million and EBITDA margins of
ssible cash injection in the beginning.Total advisory and
n of the financing fees.
ments (mandatory or optional).
hare offer price to acquire this company.
y Year 5. Average prices will initially increase by 5% per year, falling to 3%.
$25 million to build each new factory.
ine with average widget pricing.
e 15% of sales.
LTM Revenue $ 500
EBITDA Margin 20% x EBITDA
LTM EBITDA 100 Term Loans 3.0 x
Senior Notes 1.0 x
Purchase Multiple 12.0 x Subordinated Notes 1.0 x
Purchase TEV 1,200 Min Cash % Sales 5%

Fees 24
Inventory % Sales 20%
Management Options Pool 5% Receivables % Sales 10%
Payables % Sales 15%
EBITDA Exit Multiple 10.0 x
Exit Year Year 5 Tax Rate 25%
Drivers Year 0 Year 1 Year 2 Year 3

Widget Unit Sales (M) 4.0 4.4 4.8 5.2
Growth Rate 10% 9% 8%
Average Price per Widget $ 125.0 $ 131.3 $ 137.2 $ 142.6

Growth Rate 5.0% 4.5% 4.0%
# Factories 8.0 8.8 9.6 10.4

Widgets per Factory (M) 0.500 0.500 0.500 0.500
Maint. CapEx per Factory 2

Growth CapEx per Factory 25
Total CapEx 36 37 38
% Sales 6.2% 5.7% 5.2%
Gross Margin % 50% 49% 48% 47%

COGS 250 295 342 392
Fixed Expenses 150 158 165 171
Depreciation 20 23 24 25
% Sales 4.0% 4.0% 3.7% 3.4%
Cash Flow Projections Year 0 Year 1 Year 2 Year 3

Sales $ 500 $ 578 $ 658 $ 739
Growth 15.5% 13.9% 12.3%
EBITDA 100 125 151 176

Margin 20.0% 21.7% 23.0% 23.8%
(-) Depreciation (20) (23) (24) (25)

(-) Interest (32) (33) (33)
Pre-Tax Income 71 94 118

(-) Taxes (18) (24) (30)
Net Income 53 71 89
Net Income 53 71 89
(+) Depreciation 23 24 25
(+) Non-Cash Interest 15 16 18
(+/-) Change in WC (12) (12) (12)
(-) CapEx (36) (37) (38)
Free Cash Flow 44 62 81
(-) Mandatory Repayments (15) (30) (30)

(+) Beginning Cash Balance 25 39 50
(-) Min Cash (25) (29) (33)
(+) Free Cash Flow 44 62 81
CF Avail. For Debt Repayment 29 42 68
CF Used for Debt Repayment (14) (21) (34)

Ending Cash 39 50 67
Debt Balances
Term Loans 300 271 220 156
Senior Notes 100 105 110 116
Subordinated Notes 100 110 121 133
Term Loan Repayment %'s 5% 10% 10%
Interest
Benchmark Rate 1.5% 1.9% 2.3%
Term Loans - Cash 14 13 12

Senior Notes - Cash 3 3 3
Senior Notes - PIK 5 5 6
Subordinated Notes - PIK 10 11 12
Exit Enterprise Value - - -

(-) Debt - - -
(+) Cash - - -
Exit Equity Value - - -
(+) Cash from Mgmt Options - - -
(-) Equity to Mgmt Optionholders - - -
Net Equity to Sponsor (749) - - -
Sponsor Multiple 2.6 x

Sponsor IRR 21%
Sensitivity - Sponsor Multiple vs. Exit Year and Exit Multiple
2.6 x Year 4 Year 5

13.0 x 3.0 x 3.5 x
12.5 x 2.9 x 3.3 x
12.0 x 2.8 x 3.2 x
11.5 x 2.6 x 3.1 x
Exit Multiple 11.0 x 2.5 x 2.9 x
10.5 x 2.4 x 2.8 x
10.0 x 2.3 x 2.6 x
9.5 x 2.1 x 2.5 x
9.0 x 2.0 x 2.4 x
Interest Uses
Cash Fixed PIK Fixed Spread Sweep Purchase TEV 1,200
3% 50% Fees 24
3% 5% Initial Cash Injection 25
10% Total Uses 1,249
Sources
Term Loans 300
Senior Notes 100
Subordinated Notes 100
Equity 749
Total Sources 1,249
Year 4 Year 5
5.5 5.9
7% 6%
$ 147.6 $ 152.1
3.5% 3.0%
11.1 11.7
0.500 0.500
39 39
4.7% 4.3%
46% 45%
442 491
177 182
25 25
3.1% 2.8%
Year 4 Year 5
$ 818 $ 893
10.7% 9.2%
199 220
24.3% 24.6%
(25) (25)
(31) (28)
142 166
(36) (42)
107 125
107 125
25 25
19 21
(12) (11)
(39) (39)
101 120
(45) (60)
67 80
(37) (41)
101 120
86 99
(43) (8)
80 132
68 -
122 128
146 161
15% 20%
2.7% 3.0%
9 4
3 4
6 6
13 15
- 2,195
- (289)
- 132
- 2,039
- 37
- (99)
- 1,977
Sensitivity - Sponsor IRR vs. Exit Year and Exit Multiple:
0.2 x Year 4 Year 5

13.0 x 32% 28%
12.5 x 30% 27%
12.0 x 29% 26%
11.5 x 27% 25%
Exit
Multiple: 11.0 x 26% 24%
10.5 x 24% 23%
10.0 x 23% 21%
9.5 x 21% 20%
9.0 x 19% 19%

LBO Modelling

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BASIC LBO MODELLING

The PE firm plans to fund the deal with the following:

The company’s operational profile and forecasts are described below:

ments (mandatory or optional).

hare offer price to acquire this company.

Purchase TEV 1,200 Min Cash % Sales 5%

Drivers Year 0 Year 1 Year 2 Year 3

Average Price per Widget $ 125.0 $ 131.3 $ 137.2 $ 142.6

# Factories 8.0 8.8 9.6 10.4

Maint. CapEx per Factory 2

Gross Margin % 50% 49% 48% 47%

Cash Flow Projections Year 0 Year 1 Year 2 Year 3

EBITDA 100 125 151 176

(-) Depreciation (20) (23) (24) (25)

Pre-Tax Income 71 94 118

(-) Mandatory Repayments (15) (30) (30)

CF Used for Debt Repayment (14) (21) (34)

Term Loan Repayment %'s 5% 10% 10%

Term Loans - Cash 14 13 12

Exit Enterprise Value - - -

Sponsor Multiple 2.6 x

Sensitivity - Sponsor Multiple vs. Exit Year and Exit Multiple

2.6 x Year 4 Year 5

Sensitivity - Sponsor IRR vs. Exit Year and Exit Multiple:

0.2 x Year 4 Year 5

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