Help with basic LBO model

Valk

For simplicity, post-acquisition, most people assume the TargetCo's debt is assumed by the acqurior - as in, nothing changes and the acquiror assumes the debt and pays the same interest going forward. Some people show this as both a source and an use on a standard sources and uses table. It is now the responsibility of the acqurior/combined company

Huh? Most people that are in IB or are you generally speaking?

Valk

The TargetCo's debt does matter. It can actually have a material impact on the viability of an acquisition depending on what is stated in the debt contracts/indentures.

For simplicity, post-acquisition, most people assume the TargetCo's debt is assumed by the acqurior - as in, nothing changes and the acquiror assumes the debt and pays the same interest going forward. Some people show this as both a source and an use on a standard sources and uses table. It is now the responsibility of the acqurior/combined company

In reality, many debt securities have a "change of control" provision, a "poison put" provision, which basically state that if a company is sold, the debt must be repaid. Think about it - if you're a bondholder and a PE firm comes and loads the company up with debt, the quality/protection of your credit could take a hit and the price of your bonds may drop - so these provisions protect and lock-in the value of your bonds (usually repaid at a small premium e.g. @ 101). In this case, the acquiror must raise additional financing to pay these bonds back (usually in the form of some other debt security, so effectively a refinancing)

Sometimes, the acquiror is also responsible for paying to bondholders an NPV of all future interest payments that would've been received if the debt had been held to maturity (called a "make whole" provision)

Often times, a make whole provision or a change of control provision will require significant additional financing for the acquiror - which may be a dealbreaker for a potential transaction.

This may apply when doing a simple A/D analysis for a strategic in banking, and MAYBE SOMETIMES for a take-private, but absolutely not true for a standard PE LBO. You will nearly always pay an EV, assume cash-free, debt-free transaction, and leave it to the sellers to pay off the debt. (Practically speaking, your sources of cash will pay off the debt via the funds flow at transaction close, but it will reduce the purchase price paid to sellers as it is their responsibility).