Debt free cash free sources and uses (LBO)
Hi all - hope you're doing well and thanks in advance for the help.
Say we have a 10x purchase multiple on $100 EBITDA, and the target has $100 of debt and $50 of cash on its balance sheet to start. We assume the transaction is structured as debt free and cash free. Obviously EV (or transaction value) = $1000. Does equity value also equal $1000? I've seen conflicting answers. And like maybe a dumb question but logistically speaking how would the target zero out net debt if they have less cash than debt?
Is it true that (broadly speaking, ignoring taxes, etc.) the buyer doesn't really care whether it's CF-DF or not? Because it's like they're paying the same $1000 either way and they don't care whether they're paying part of that to debt holders or all of that to the equity holders, right?
If it's CF-DF, can you basically just pretend the target had no cash or debt on its balance sheet to begin with?
Thanks! Appreciate the help.
Hi Analyst 1 in IB - Gen, hope I can help. Do any of these links cover what you're looking for:
More suggestions...
I hope those threads give you a bit more insight.
Like many other people, I had no idea that I would be dealing with the investment industry in the future. It started about 10 years ago when I first invested in real estate.
A lot of people get tripped up on cash free debt free, but it’s simpler than you think.
You come up with your enterprise value based on earnings the business generates. That’s your outlay, in your example $1bn. What the seller receives depends on the capital structure. From the buyer’s perspective, it doesn’t make sense to buy a ton of extra cash, and the debt the sellers put on the business isn’t the buyer’s problem.
So back to your example buyer would come up with $1bn, $100mm of which will be used to pay off the debt at close, and the extra $50mm of cash in the business will be distributed to the seller. The seller walks away with $950mm.
This is correct but it’s the theoretical answer. In practice you always want to fund some cash on b/s so seller gets $950 but buyer probably has to cough up $1,050 as $50 will stay on b/s (assuming that’s the number) which is likely funded by a mix of equity and undrawn RCF (depending on RCF size).
Sure, but so not to confuse everyone the buyer is still paying $1bn for the business. If they want extra cash left behind they’re paying for it on top of the $1bn, since it is a cash free / debt free transaction.
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