Folks,
I am practicing for my up-coming interviews and found this problem on 10xEBITDA. They described the problem under paper LBO section but I do not think I will be able to finish this in 15-20 minutes, hence the title of this post explains my rationale. I hope everyone can chime in and provide inputs for my solution below.
Original Prompt: The company is a retailer with 20 stores and has a Year 0 revenue of $5,000.
Every year, the retailer opens 5 new stores. Opening each new store will require $20 in growth capital expenditures but will add $150 in sales in the first year of operation. Each new stores built after Year 0 grow revenue by $10 every year after the first year. The existing 20 stores’ cumulative revenue grows by a total of $250 every year. All new and existing stores has an EBITDA margin of 20% and need maintenance capex of $3 / store every year. Each store has a D&A of $5.
For maintenance capex and D&A calculations, include impact of new stores from the same year in the count. Changes in working capital is a flat $110 every year. We’re buying the business at the end of Year 0 at 10x LTM EBITDA and financing it with 4x of bank debt @ 5% interest and an additional 2x of bond @ 10%. Assume 40% tax rate. Exit at the end of Year 5 with the same multiple as at entry.
Summary of Assumptions from the Prompt:
1 Y_0 revenue = $5000
Existing Stores = 20
2 a) 5 new stores / year
b) $20 / year growth CapEx
c) Each new store generates $150 first year operation
3 New store revenue growth = $10 / year
4 a) ALL Stores: EBITDA Margin = 20%
b) CapEx = $3 / store / year across the board
5 D&A each store = $5 / year
6 Change NWC = $110 / year
7 Entry Multiple = 10x Y_0 LTM EBITDA = (assuming) Exit Multiple = 10x Y_5 LTM EBITDA
8 Debt Tranches:
a) Bank Debt = 4x Y_0 LTM EBITDA @ 5% interest rate
b) Bond = 2x Y_0 LTM EBITDA @ 10% interest rate
9 Tax rate = 40%
10 5-year holding period
My solution:
Notes:
1) New stores revenue for year 1 = 5x150
2) Revenue for "New" for year 2 = 750 + 5x10 + 5x150
3) CapEx year 1 = 5x20 + 25x3
Please harshly correct me where I am wrong. Thanks!
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