Just took an LBO modeling exam for an interview and had a question. Part of the financing was a seller's note at 0.5x leverage (in addition to a revolver and term loan). I was fine with setting up the sources and uses, but was not sure how the seller's note gets treated in the debt calcs and IRR.
The exam said that the seller's note gets paid out only if EBITDA reaches a certain level. Does it get included in net debt that gets subtracted out to reach equity value in the exit year? Or if it gets paid out then what happens? Thanks.
It's not clear from your description:
1) Typically, a sellers note means a PIK loan, which is treated just like debt. In this case, maybe there is a cash payment if EBITDA exceeds a certain level. That means it is just a regular loan where the cash interest/PIK/principal repayment depends on EBITDA
2) However, if it is structured as an earn out i.e. the seller loses his money if EBITDA target is not reached - typically it is not in net debt but is treated as a claim on equity at exit i.e EV-Net Debt - Earn out = PE funds equity on exit.
I hope this makes sense.
Can someone explain answer #2 a little more thoroughly? I appreciate the answer but it's still not clicking for me. Some clarification would be appreciated as I've never heard of an instrument like this before.
Earn out is pretty much like a subordinated note to the equity (GP/LP if the equity is snydicated), it's still paid out but just not at the top of the waterfall like senior debt. Should be very expensive given its place in the cap structure...
Eum nisi quo ut sapiente exercitationem facere. Pariatur delectus mollitia repudiandae sint reiciendis ratione. Perferendis id ducimus placeat autem est maxime molestiae. Molestiae eligendi quas sunt similique odit. Odio quos ut doloremque aperiam.
Sit quibusdam enim eum et qui. Iusto rerum nulla mollitia sed rerum ipsa nesciunt. Ex repellat blanditiis nihil ea. Eum quia a quaerat et. Ut sunt earum eius numquam vel exercitationem rerum.
Officia est id adipisci eaque quia dignissimos sunt possimus. Rerum ducimus voluptas assumenda dolores. Eos iste eos reiciendis quia expedita dignissimos ut qui.
Cumque quisquam architecto quis beatae et. Et molestiae est aut animi. In quaerat voluptatem id tempora ab.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...