Interview Question/Case

MezzKet:

Debt to equity? where do you guys get this shit, if you don't know, shut-up...

he said pe/vc, so therefore if you knew anything, your debt to equity suggestions are complete and utter garbage...

PE...LBO....having a low level of debt is a beneficial characteristic in a target...D/E....

MezzKet:

Yea I agree but your ratio is way off... +1 for your understanding of an LBO, -1000 for your shit understanding of LBO metrics...

To answer the authors post in analyzing LBOs: Thesis: - Understandable business model that is not burdened with complexities (more complexities make for errors is risk assesment, crucial to seeing the failed LBOs of the past and recent); - Revenue visibility, preferrably through recurring revenues as opposed to short-term project based; - Low capex with an improvable W.Cap - Good Margins (which ones?); preferably high EBITDA margins of 10+% that drive a health FCF; - Variable cost structure able to collapse with a downturn; ---Little raw material exposure that may balloon, like oil, killing cash flow and margins; - Beneficial tax structure from the LBO (some NOLs always great); - Fragmented industry segment that allows for build-ups and consolidation; - Management team that has proven consistant growth in past experiences, with company or externally; - Low regulatory risks and pressure to pricing (usually when there are only a few big players than can sway the market); - Comfortable customer concentration (not too low, not too high)

Ratios: - Senior Debt / EBITDA - Total Debt / EBITDA - Net Debt / EBITDA - Net Debt / EBITDA - Capex - EBITDA / Interest - EBITDA - Capex / Interest - Fixed Cover Charge Ratio - EBITDA - Capex +/- working cap / EBITDA (cash flow conversion ratio)

At closing ratios: % of Debt/Total capitalization % of Equity / Total capitalization X of Debt / EBITDA X Equity / EBITDA EV / EBITDA

should I keep goin with why your Debt / Equity ratio in a target is garbage and of no real value to the analysis or would you like to teach me about leveraged buyouts as well?

Listen, jackass, I was giving the poster a direction to go into. I was not claiming to be the authority on leveraged buyouts. Jesus fucking christ, chill the fuck out.

jmcfadden:

Agree with your qualitative assessment of LBO candidates, but I totally disagree with the ratios you identified as being important. Historical cap structure is totally irrelevant because we are recapping the company as part of the acquisition. What am I going to conclude about a company based on its current fixed charge ratio? Fixed charge is only important in the context of your debt covenants (which are going to be outside the scope of a 30 minute quick assessment). You would probably only look at Net Debt / EBITDA (which informs whether or not the company is under- or over-levered).

If I were to assess a business based on its financial ratios, I would look at historical trends in the following metrics: high RONA (EBITDA - Capex) / (Net PPE + WC), moderate EBITDA Margin, high sustained revenue and EBITDA growth, low NWC (% of Revenue), and low Capex (% of EBITDA). I would also look at valuation multiples (i.e. TEV / EBITDA and TEV / (EBITDA - Capex) to get a sense for where the company is trading (informs exit multiple if you don't have other info).

my ratios are all post close, I could care less about what they looked like pre-transaction, in total agreement to you, only thing affecting my pre-transaction analysis is investment these and P&L (down to EBIT)...