Cash Free Debt Free
I was thinking through this the other day and wasn’t able to find very clear answers so I’m hoping you all could help me out.
I know the vast majority of LBOs are done on a cash free debt free basis, but I was trying to walk through the pros and cons of that approach vs. rolling the balance sheet. More specifically, is there a scenario in which either the buyer or the seller would find it preferable to roll?
My rough understanding is the seller nets out equal in 99% of scenarios, either receiving less proceeds up front (rolling BS) or receiving more proceeds but having to pay down the debt thereafter (cash free debt free). Anybody know the circumstances for that 1% to come into play?
cash free debt free is primarily a heuristic for pricing. companies need operating cash and don't actually run cash balances down to zero for a transaction. this is accounted for in closing adjustments.
paying cash for cash is a return drag for the sponsor (bigger denominator in MoIC calc) so excess cash is almost always extracted before closing.
for debt, subject to the lender ok'ing change of control (big if), it makes sense to roll existing credit lines locked in at favorable rates/terms.
Great point on the MOIC drag, I hadn't thought of that.
Here's to hoping our next deal's lenders will be ok with rolling over some good old fashioned L+400, single covenant unitranche!
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