Case Study - Transaction Close Flexibility?
I am working on a case study where the CIM provided is in spring 2021 and they only give projections out to FY 2025. would it be wrong to assume transaction close of 12/31/2020 for simplicity (and calculate multiples based on LTM as of 12/31/2020, and then build my own 5 year case? how would you approach this situation?
didn't get any guidance on transaction close, but assuming I could also model a 6/30/2021 close and use LTM as average of 2021B (my own projected case, separate from management case) and 2020 EBITDA?
Don’t assume transaction closes before the date of the CIM - 6/30 close is right and use assumptions to project it.
As a broader commentary around stuff like this, which is confusing to junior associates, is that you should really try to mentally separate out your operating financial forecast from your returns (LBO).
What I mean by this is you should first do the P&L (to EBITDA), NWC, CapEx, and other B/S forecast that don’t include debt from FY 2020-FY2026. These should more or less be independent on when transaction closes, barring some stupid “value creation” initiative that somehow drastically changes the trajectory of the company.
Then, you worry about the LBO part, where you now have the information to do your rolling LTM 6/30/21 figures, and since you forecasted to 2026, you can get your exit as of LTM 6/30/26.
When you do your cash flow build, you similarly stub the cash flows to be half of 2021, and half of 2026 - for things like NWC, CapEx, interest, etc, you can simplify it and just take 50% of what the full year value would be. This allows you to get the debt balances correct, which is the only other thing you need for returns. Then make sure you do XIRR, and you’re good.
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