LBO model-Management Rollover Equity-Sources and Uses-Urgent
Appreciate it if anyone could help....Thanks..
In a LBO transaction with mgmt rollover:
The EV is $100, debt on target B/S is $50, cash on target B/S is $10, the equity purchase price (or equity value) is 100-50+10=$60
Assume the mgmt previously held 100% stake of the Target, and it now wishes to trim its holding by 80%, i.e. rolling over 20% equity.
Assuming:
*New debt raised=$50 (just a random amount, not related to the $50 debt on target B/S)
*Using the $10 cash on B/S as a source
*The $50 debt on target B/S is refinanced
*No transaction fees.
I am wondering if method A or B is the correct one.
Method A
Uses:
*Refinanced Debt: $50
*Purchased Equity: $48
(Equity Purchase Price x Proposed disposal % by mgmt= $60x80%=$48)
*Mgmt rollover: $12
(Equity Purchase Price x Proposed rollover % by mgmt=$60x20%=$12)
**Total Uses: $110
Sources:
*Cash on target B/S: $10
*New Debt Raised: $50 (just a random number)
*Mgmt Rollover: $12 (same as the $12 in uses)
*Sponsor Equity: $38 (a plug to force Total Uses=Total Sources: 110-12-50-10=$38)
**Total Sources: $110
With Method A, after the transaction, the mgmt. should have a 12/ (38+12)= 24% stake in the target, instead of the proposed 20% rollover %.
Method B
Uses:
*Refinanced Debt: $50
*Purchased Equity: $48
(Equity Purchase Price x Proposed disposal % by mgmt= $60x80%=$48)
*Mgmt rollover: $12
(Equity Purchase Price x Proposed rollover % by mgmt=$60x20%=$12)
**Total Uses: $110
Sources:
*Cash on target B/S: $10
*New Debt Raised: $50 (just a random number)
*Total Equity Contributed: $50
(a plug to force Total Sources=Total Uses: 110-10-50=$50)
OF WHICH: Sponsor equity: $40
(Total Equity Contributed x Proposed disposal % by mgmt=50x80%=$40)
OF WHICH: Mgmt rollover: $10
(Total Equity Contributed x Proposed rollover % by mgmt=50x20%=$10)
**Total Sources: $110
With Method B, after the transaction, the mgmt. should have a 10/ (40+10)= 20% stake in the target, equating the proposed 20% rollover %.
Again, my question is which one is correct, A or B?
A.
also you are confusing the term "rollover" with "pf ownership", they are not equal.
also, you dont show management rollover as a separate line item in uses. its just 60 for "equity purchase price"
Thanks very much!
But now, I am wondering what would be the proper way/ wordings to describe what I wrote before:
“…the mgmt previously held 100% stake of the Target, and it now wishes to trim its holding by 80%, i.e. rolling over 20% equity…”
Pls suggest the correct wordings.
Uses: *Refinanced Debt: $50 *Equity Purchase Price: $60 **Total Uses: $110
Sources: *Cash on target B/S: $10 *New Debt Raised: $50 *Mgmt Rollover: $12 *Sponsor Equity: $38 **Total Sources: $110 This S&U should be correct now, right?
Million Thanks!!!
Method A is correct. Think of it this way:
Sources: Cash on BS: 10 New debt: 50 Sponsor equity: 38 Total cash sources: 98 Mgmt rollover: 12 Total sources: 110
Uses Equity purchase: 48 (i.e., (100-50+10).8) Refinance debt: 50 Total cash uses: 98 Mgmt rollover: 12 (60.2) Total uses: 110
I have always heard it phrased as "mgmt want to reinvest (rollover) x% of their proceeds". It is then clear that that x% is not equal to their share of the new equity.
Thanks very much!
Correct wording would be: management is rolling over 20% of their equity stake in the company into the new PF entity. The Uses should be broken up into the 48 and 12 because if you just use 60, you may get some people confused. It's not wrong but just more clear to write it like I wrote above, that way people can see that only 48 of the 60 is being bought out with cash and the 12 is being rolled over, as opposed to giving the impression that 60 is being paid for in cash.
It's just optics, but will make it clearer for others.
I disagree. Showing the $60 to make it easier for people to see and understand the "equity value" of the asset The management rollover is a source to help fund the LBO
Agree to disagree bunkerbanker, this is how I do it at work
LBO-Sources and Uses of Cash (Originally Posted: 07/14/2011)
Why do sources and uses of cash in lbo model have to equal each other?
Cash in an LBO is like matter / energy in thermodynamics - it can neither be created nor destroyed.
If sources > uses, then where did the extra cash go? If uses > sources, where does the money come from?
Excellent answer. Brian from BIWS would be proud!
Great physics comparison. It's simple: You cannot use what you do not have... unless of course you are the American government. LOL!
whats the formula for irr? (other than using excel and rule of 72)
It's the rate that makes the NPV of the project 0... if you have the inputs and set NPV equal to 0 you can solve for the rate...
someone gave me this formula. same as above, except for the "-1" at the end
(exit value/entry value)^(1/(# of yrs))-1
is that right? thanks for help guys
That is correct
then why do we subtract 1?
Seriously dude? You subtract 1 from any growth/return/etc calculation. If I have $100 at the start of the year and $110 at the end of the year, my return is 10%, not 110%
yup sorry. that was a stupid question.
just use the IRR function for when you start modeling in dividend recaps and other scenarios
Sources and Uses in LBO (Originally Posted: 10/29/2014)
Working on an LBO for a software company that has no existing debt but large cash balance. I am unsure how to lay out the sources and uses as equity value is actually greater than TEV given net debt is negative.
Here's an example, let me know how to lay this out. TEV is $200, debt is $0, and existing cash on balance sheet is $50. Also, there is a $25 minimum cash requirement for balance sheet going forward. Please help as soon as possible. Thank you!
Sponsor would pay $225 to purchase the company and fund the balance sheet requirements. Seller would receive $200 from the sponsor and take $50 off the balance.
Sources: Debt & Equity $225
Uses: Purchase Price $200 Cash at Close $25
So your new balance sheet cash drops to $25 directly after the transaction?
Not necessarily the way I would lay that out
Sources: $25 Cash from Balance Sheet $225 D / E
Uses: $250 Purchase Price
So you wouldn't need to add min cash to uses in this case, since you're only taking 25$ off? Also, is this $250 your equity value (TEV - net debt)?
Both my earlier suggestion and HarvardOrBust's will suffice. It probably depends how they are marketing the Company. I.e. if they say the balance sheet is free of debt and cash - my earlier suggestion would be best. If they inlcude the $50 of cash but only indicate the buyer will need $25 to operative the Company - HavardOrBust's suggestion would be best.
PM me if this doesn't make sense.
Awesome, that makes sense. Since the company lists balance sheet cash and requires cash to operate, the latter seems to fit better. Thanks a lot for the help with this, much appreciated.
Tax Refund in Sources of LBO (Originally Posted: 05/19/2015)
Curious if anyone has seen "tax refund" in the sources of funds in an LBO (as seen in the Macabacus model below)?
https://www.macabacus.com/excel/templates/lbo-model-long
Want to bump this up as I am still curious 6 months later. I have reached out to Macabacus with no response.
I've been in banking and PE, I have never seen it. Has anyone? And if so, what are your thoughts?
Theoretically it is correct and makes sense but practically I have never seen it. Actually, at my firm we are usually conservative regarding sources and uses and usually we assume we should fund with equity injection whatever is not covered by debt. We usually don't even treat cash as potential source because before you actually make acquisition, you can't access this cash or be sure that it is not locked up due to lenders' restriction or some other accounting or tax trap. So in most our acquisitions sources consist only of equity and debt.
For acquiring public companies it might be different, not sure - I only acquired private ones.
Role of seller's cash in LBO Sources and Uses (Originally Posted: 10/27/2015)
hi everyone, question on how to think about cash and debt on a sources & uses table. I've seen models that have seller's balance sheet cash as a source and full amount of debt being refinanced as a use; and I've also seen models that have net debt as a use with no explicit mention of seller's cash as a source. these two methodologies are equivalent and a matter of preference/clarity, right?
Also, is the seller's cash on balance sheet always assumed as a source of funding in LBOs? How does this role into the fact that typical private co offers are on cash free/debt free basis (seller pays debt and takes cash)? Are these types of offers more typical for term sheet purposes, whereas cash is assumed as a funding source and debt paid down in the actual transaction model? hopefully my questions are clear here; appreciate any help/insight.
Yes, it comes down to preference. You can show cash as a source and gross debt as a use; or choose to just show net debt. It will make no difference in the returns.
I like to show net debt. In my mind it is more intuitive as any existing cash on the seller’s books will be used to pay down existing debt. This point helps answer your second question – if debt > cash, then the cash will be used to pay down what it can of the debt balance and the remaining debt will be paid off by the proceeds from the sale. In the rare case that cash > debt, the debt would be paid down from the cash balance and the buyer would keep the cash that remains in addition to the proceeds from the sale.
In both of the above scenarios, the buyer is left with a company that has no debt and no cash – hence, “cash free / debt free”.
There can be nuances like minimum cash, also known as operating cash. This would show up as a use and is typically provided by the seller as it is required to operate the business.
Thanks, grainflow that's helpful.
your example where cash > debt helps illustrate exactly what I am trying to understand in terms of deal mechanics and who keeps what. in terms of original purchase price calculation, an offer is typically based on multiple of ebitda to get to an enterprise value for the target. from there the walk to equity value would be larger number given that cash > debt. since the uses side will have a net debt that is negative, does this serve to effectively lead to a total uses number that is smaller than the previously calculated equity value. i've laid the two scenarios out below and for simplicity assume no fees and full equity used to acquire firm (realize that both these are insane given LBO tag but trying to understand specific concept); i'm most particularly interested in the second sources and uses table (assuming both are laid out correctly) as it results in what i mention above:
Transaction summary EBITDA $10.0 Multiple 10.0x TEV $100.0 Cash 50.0 Debt (20.0) Equity $130.0
First scenario, where debt is shown in full and cash as a use Uses
Equity 130.0 Debt 20.0 Uses $150.0
Sources
Cash from b/s 50.0 Sponsor 100.0 Sources $150.0
Second scenario, where net debt is shown in uses: Uses
Equity 130.0 Net Debt (30.0) Uses $100.0
Sources
Cash from b/s -- Sponsor 100.0 Sources $100.0
i realize that sponsor equity in both cases are equal and below the calculated equity value in the transaction summary, but wanted to get your input on the total uses number also being lower in the second case. take your point that certain minimum cash needed to operate is more like a working capital item and is therefore fundamentally included in enterprise value and should be contributed by seller. thanks again for your help i think i am 99% of the way there in being fully comfortable on this!
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