I am currently going through the multiple expansion LBO (easily findable on google, not sure if I am allowed to post links here).
My question is related to the transaction assumptions:
- The business has an LTM Adj. EBITDA of $90mn and we are purchasing it at a 9.0 EV/EBITDA Mutliple - the business has also cash on balance sheet of $5mn
- Following, I would have computed the equity value as EV - Debt + Cash. In that example EV = 810, Debt = 0, Cash = 5; Equity value = 815
Rationale: I need a minimum cash balance of $5mn. So somehow I need to fund it. The operating assets of the business are worth 810 only and if I don't add the 5mn in cash I will end up with a business with zero cash.
I don't get why this is ignored in the model, can anyone give me some guidance?
Looking at the model you referenced the easiest way to think about it in that context is you have $5M cash but you're required to have a min of $5M cash to operate so it's almost like a debt item (i.e. $5M cash + $5M debt = $0 impact). That minimum cash is req'd for day-to-day ops and trapped for value purposes, it's not really excess cash that can be used to "fund" the deal
Thank you. So the rationale would be that it is "operating cash" and thus EV = Equity Value (as EV is the value of all operating items).
I was just confused because I've seen other models where they assume debt free/cash free balance sheet and then do two steps:
In the example discussed it is thus taken for granted that the existing cash just stays in the business without compensating the buyer.
Don't overthink it. Cash is not in EV.
You negotiate the deal value typically on an EV basis. The EV is definitionally determined as the value of the company assuming it is cash-free and debt-free.
Because the EV was on a cash-free debt-free assumption, the consideration you wire to the seller in exchange for the shares of the business ("Equity Value") requires you to add/subtract both:
Here you are doing that and you would like to leave $5m of cash in the business. So you pay the vendor $5m for the cash they have on the balance sheet. Alternatively you could theoretically decide to buy the business and let them sweep out $3m as a distribution ahead of closing, in which case you would only pay them for the remaining $2m.
Regarding your alternative example, sure yes you could theoretically have a different flow of funds where the seller sweeps out the cash, and then you are required to fund any minimum cash balance through a separate injection. This is often not the most tax-efficient or simple way to structure a transaction but does happen. Either way the funding requirement for the purchaser is the same, which is why you add cash to the equity value consideration paid to the seller in any transaction.
It's never ignored. If you need 5m to operate the business, then you will be paying 815m for the business. This 5m is not a source to cover your deal.
If it was just excess cash, then it wouldn't make a difference. You can use that 5m to pay for the 810m value, paying effectively only 805, or they could take it away, and the EqV would go down by -5, so you're also paying 805 from your pocket.
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