For context: I did two self-study modeling courses (one with Corporate Finance Institute, one specifically related to LBOs, and both models have the same approach for post-close ownership calculation, which confuses me. I understand how it's calculated, but not why (and neither explained)
Using a hypothetical scenario to explain what confuses me, and let's assume no fees for simplicity's sake:
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$10M enterprise value as purchase price
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Seller rolls 20% ($2M)
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$4M of debt.
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Fund contribution of $4M.
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Post-close equity value in this case would be $6M.
The way the two models calculate common share ownership is as follows: The seller has $2M of the $6M post-close equity value, and the sponsor has $4M of the $6M. This means the seller has 33% ownership, and the fund has 66% ownership. Then, when you sell the Company five years later, the seller gets 33% of the proceeds, and the fund 66%.
The way the 33% / 66% is calculated is clear and simple. That said, to me it does not make sense. If the company is bought for $10M, and the seller rolls 20%, shouldn't the seller ownership be 20% (based on enterprise value), rather than 33% (based on equity value)?
Using the house analogy, if I buy a house for $1M, and have a mortgage of 80%, I still own 100% of the house, no matter how much leverage is used.
You own 100% of the equity in the house. If you sold the house for $1M and you owned $200K in equity, the remaining would go to the bank.
I understand that. I guess the house analogy was useless here.
I'm really trying to understand why the two models would show the common share ownership based on the equity value, rather than the enterprise value (which is the purchase price). I don't get why they would give me a 33% / 66% split, rather than a 20% / 80% split
Why are you using your real name?
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