LFCF formula????
"Walk me through the Free Cash Flow calculation in an LBO model. How is it different from EBITDA, and why do we need both?"
"In an LBO, Free Cash Flow = Net Income + D&A +/- Change in Working Capital – CapEx."
From BIWS 400 Guide
Bruh. Is LFCF not NI +D&A - capex - change nwc + net change in debt (new debt - mandatory debt repayments)?????
Why is it excluding the change in debt? thought the whole point was to see the cf available to cse holders?
Levered Free Cash Flow is cash flow after debt-associated costs. It is the cash flow that is left over available to equityholders.
Unlevered Free Cash Flow is the same figure but before the effects of debt (interest expense/tax shield, amortization of debt principal).
We need EBITDA because it is a standardized measure/proxy for cash flow that we can apply to most companies for easy and quick comparability. We need Free Cash Flow when we want to understand the "true" cash flow that a business generates. Free Cash Flow provides more depth by accounting for things like Change in NWC and Capex.
What do you use in an LBO model? Which formula?
This is kind of just semantics on a metric that really does not have any strict definition.
Remember that in a traditional LBO you’re not using the cash flows to derive a value directly like you are in a DCF. You’re using cash flows to model how much debt you can sweep, and you’re calculating an IRR on a cash outflow at entry and inflow at exit (let’s just keep it simple for the sake of example).
Mechanically, the way this usually looks in an actual model is you would have a line for Levered FCF, then a line for mandatory debt repayments, then cash flow available for (optional) debt service which would flow through the debt schedule to sweep debt. That line is essentially what you are used to thinking of as LFCF in a DCF context.
It’s sorta just presented differently in different contexts. But in an LBO it’s more about mechanics of the model and clarity/convention whereas in a DCF that stream of cash is directly driving a value and must account for those debt payments to be correct.
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