LBO Model Help
Hello
I am working on a practice LBO model and was wondering someone can clarify this concept to me.
Assumptions provided
- This is a cash free debt free deal (question explicitly mentions Seller keeps ‘all’ cash and is responsible for all existing debt)
(i) Revolver is drawn at close to only cover some transaction fees
(ii) $3M is minimum cash requirement
(iii) $3M is funded to the balance sheet at close ---
I am trying to understand the $3M funded to BS part. The prompt says this is a cash free debt free deal so I am guessing seller isn’t putting this $3M on the balance sheet. Additionally I am told that revolver is only drawn at close to cover some transaction fees. So now where is this $3M coming from to fund at closing? Is the seller only entitled to what is remaining after funding $3M to the balance sheet? If so, then how is this a cash free debt free deal. Or Is additional revolver drawn (cover transaction fees + 3M cash funded to BS) at close to cover the minimum cash balance?
Appreciate any help. Thanks
This means you need to increase your equity check by $3M to cover the min cash requirement, assuming your other financing sources (debt,etc) are constant. They explicitly say don't use the revolver for non-txn fees so don't do that. If you run your initial equity check math and put the additional $3M as a use of cash, you'll see this.
Its a cash free debt free deal so investment size is EBITDA times Multiple.. I cant change anything here. On the sources side components of debts are fixed (only adjustment I can make is revolver but they mention that at close revolver is only used to fund some fees).. so this technically makes sponsor equity a plug...
Sponsor Equity = Investment Amount - Debt
I don't know what you mean by you can't change anything. Sponsor equity is ALWAYS a plug for a traditional buyout LBO.
Uses (do this first)
Sources (do this Second)
Ok if Cash to Balance Sheet is on the uses side then where is this cash coming from? Thats what I am trying to understand? Is this Sponsors Cash, from Debt being raised or from Sellers pocket..
Dude...your Term Loan debt (or whatever it is) is fixed. Your Revolver draw is equal to fees, so it's fixed. Where else would that money possibly come from? I don't know if you're overthinking it or something but like it's not that complicated. Dude above literally told you that there is always an sponsor equity plug, so maaaaaybe it comes from the sponsor?
Thanks. So on the BS adjustments Old Equity goes to 0 and New Equity is Sponsor Equity less minimum cash that Sponsor is contributing (since that minimum cash is on the Asset side of adjustments..)
Also mind if I PM you?
Also not correct. Simplistically, New equity is equal to sponsor equity. This is on the Equity side. Then your cash adjustment is $3M. Do you understand why this is the case? Assume you invest into a company and put in $100, and all of it goes as cash to balance sheet. In this case, cash goes up by $100, and equity goes up by $100, because they have to balance.
Instead of PMing, I think you should just download a free template and Google a step by step guide.
Cash-free mostly means that you buy the company without any excess cash. The $3M in the BS reflects the value of equity. If you want to lower that 3M you need to lower the equity value (= company's liability to their shareholders). The cash value on the balance sheet is added to the acquisition price to compensate the seller for it.
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