LBO Model with Earn-out and Rollover
Hey, I've been reading the forum for ages. To be honest, you guys helped me get this job in PE, so thank you! However, we've gotten stuck in a discussion about the following:
Now, I'm working on an LBO model that has an earn-out (cash earnout paid from cashflows) and rollover. The problem is double:
The company might not have enough cashflow at the time the earnout is due to pay for it. Could it raise debt or would this be against the company's interest even if it has a contingent liability?
For the second one assume offer price of $20m EV based on $0 net debt and let's say we're buying 80% of the company. If we raise debt for the acquisition of $6m, so we only have to pay $10m, but the debt wholly sits on the balance sheet and we still get our 80%, wouldn't the vendors says no way their equity value would be getting diluted by the debt without getting any benefit from it?
My argument would be that if both percentages of equity in newco are fixed the previous' owners cashout should be variable based on this, so they get their due percentage of leverage benefit?
Hope it's not too unclear!
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