DCF Analysis Equity Value < BV of Equity
Hey All,
Need help, first time doing an LBO on a company whose cash flows are not sufficient to cover needed debt, as a result my DCF equity value is less than book value of equity at closing. Is this normal? Does it mean I should try to purchase the company for less that it is worth on the books?
Please help!!
If the company cash flow can't cover debt payments, then I don't think it would be a good candidate for LBO. After takeover, the company would have to be able to cover existing debt payments as well as the payments on the debt that is taken on by the acquirer. It would fail.
I think.
On it's face it sounds like you're paying too much. Are there chances for operational improvements/synergies/roll up that aren't being accounted for in your model? Most LBO values are priced based on debt service, not the other way around. If you're aiming for a certain amount of leverage with a certain cost of debt, then those two figures will imply a purchase price based on the historic/projected cash flows. PM me if you have any particular questions.
Thanks all, appreciate the advice. Had my presentation the other day, went well. Ended up discounting the Equity Value by 15% and putting more equity to sustain the debt. The interviewers first questioned my assumptions but I was able to back them up so I guess that is what counts.
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