Impact of fees on LBO Model (IRR, MoM)
Hi everyone,
I'm working on LBO papers and I don't understand how to integrate fees. I've looked at this topic (https://www.wallstreetoasis.com/forums/lbo-def-fi…) and it seems like I can amortize them. If this is the right reasoning, over what period of time should I amortize? The duration of the investment? And in this case, it doesn't have any impact on the EV or EqV but only on the FCF?
And I also do not know how to use this item in my model:
"Interest on cash balance/ RCF: 0.5%"
Thanks guys!
Let me see if I can answer this briefly/quickly.
There are two types of fees 1) M&A fees (also known as advisory fees) and 2) Financing Fees. We'll focus on #2 as M&A fees are paid during the transaction and have no real impact on the actual holding period/operating model build
Typically financing fees are x% of total debt raised. So for instance if you raised $100m of debt your financing fees would be $2m (assuming 2% of total debt for this example) and that $2m would fall within the B/S as a contra-lability (or for modeling purposes you could put it on the asset side).
Your financing fees are generally amortized over the same lenght as your debt item (typically 7-years). So following the same logic above you would amortize $2m/7 = ~$0.3m annually. This amortization will flow into your income statement as an amortization expense but you will add that back in your CFS as its a non-cash expense but within your B/S you will should see your financing fee decrease by $0.3m each year (based on the assumptions above).
It would have an impact on your final EV as less cash (albeit miniscule difference) is being generated because of this ~$0.3m financing the business is paying each year.
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