Modeling in LBO Add-ons

Based on the most helpful WSO content, here's how you can properly model add-ons in your LBO models, especially when incorporating equity injections:

1. Funding the Add-On Acquisition:

   • While drawing down the revolver is a common approach for smaller acquisitions, mixing in equity requires adjustments to your model. You need to track the equity injections separately for each add-on acquisition.
   • Ensure that your funding sources (revolver, term debt, or equity) align with the credit agreement's leverage thresholds and any other constraints.

2. Equity Value Adjustments:

   • When calculating the equity value prior to the MIP (Management Incentive Plan) distribution, you must include a running total of the equity injected for add-ons. This ensures that the equity base reflects all contributions made during the hold period.

3. IRR Calculation:

   • For the IRR calculation, it’s crucial to account for the timing of each equity injection. Add the additional equity in the respective hold year when the add-on acquisition occurs. This ensures that the IRR calculation accurately reflects the cash flows and timing of investments.

4. Balance Sheet Integration:

   • If your model includes a bonus module for add-ons, ensure that the balance sheet impact of the acquisition is properly integrated. For example, the WSO financial modeling courses often treat add-ons as asset acquisitions for simplicity, but you can adjust this based on the specifics of your deal.

5. Return Impact:

   • Use flexible toggles in your model to analyze the impact of add-ons on returns. This includes showing how buying down your multiple affects overall returns and sensitivities.

6. Additional Considerations:

   • If your add-ons involve idiosyncratic features like convertible preferred debt, liquidation preferences, or warrants, ensure these are modeled correctly. The WSO courses include structures like preferred stock with PIK toggles, which can be helpful for such scenarios.

By following these steps, you can ensure that your LBO model accurately reflects the financial and return implications of add-on acquisitions, whether funded by debt, equity, or a mix of both.

Sources: NEW Financial Modeling Training Courses, NEW Financial Modeling Training Courses, Top Financial Modeling Courses - List of Top Financial Analyst Courses, How Private Equity Owned Companies Fund Add-Ons