PE Case Study - LBO with CIM

Hey guys, I looked for a clear answer to the following case study in the old discussions, but I couldn't find any: what's the best way to approach a LBO exercise with a full (50+ pages) CIM and no assumptions given in terms of sources (including type and cost of debt) and entry/exit multiples? The task is simply to get to an IRR and discuss the returns in a short investement memo.

Thank you!!

 

Do a quick comps to find out current trading multiples and assume entry equals exit (unless you can very reasonably argue otherwise). Similarly you could also look at debt / ebitda ratios of public peers and (depending on the size of the target) discount that to account for risks associated with smaller firms. Although I'm not entirely sure you should be fine staying away from mezz and using a senior A (yearly 5 year amortization) and senior B (bullet in year 6) at 4%-5%.

 

In that case I would argue that they are trying to test your reasoning. Try to get a grasp of multiples of major industries and what drives valuation in those industries, then apply that to the CIM you are presented with. As far as debt is concerned, try to think like a bank; a company that has a clean balance sheet or a company that has successfully grown and consistently paid down debt over the years is more likely to be able to attract higher multiples (north of 3x ebitda) than a company with a relatively unproven business model in a highly complex industry. Hope this makes sense, just my two cents!

 
Best Response
ctrlaltelite:
In that case I would argue that they are trying to test your reasoning. Try to get a grasp of multiples of major industries and what drives valuation in those industries, then apply that to the CIM you are presented with.

I tend to agree, if you come out with like 5x Rev you should provide a reasonable explanation for that, but without data and little/no knowledge of industry/sub-sector (or even more if you don't have info about it - though not the case) if you say 1x or 1.5x or 2x Rev that is clearly not the point of the whole valuation. The reason why they ask you to model an LBO is to test your reasoning as well as your modeling skills. At the end of the day, if you build a working, effective lbo model and it turns out the proper multiple is 5x Rev for whatever reason, it's a matter of a second to change it.

I definitely agree that without a valid reason you have to use the same multiple both entering and exiting.

As for the debt - the point is to check if you have any rough ideas about how the banking world works - in this case, you can't end up with a D/E of 5 or 10 as banks will not lend that much to a firm. You can use some kind of metric to determine how much (e.g. D/E or multiple of EBITDA, they are both a starting point... Remember: valuation is both a science and an art, so there's not 100% right response).

 

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If we're lucky, the following pros may have something to say: EuroGorilla bule Radu-Georgescu

I hope those threads give you a bit more insight.

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

30mn reading + business understanding (what is the USP, product etc) 1h preparing commercial slides 1h LBO (i guess it depends on the background whether you need 1h for your LBO/commercial work) 30mn check + formating (primarily slides)

from experience, focus on 3-4 key value creation/DD items with a more detailed answer; in the end: it doesnt matter whether you got an IRR of 14% or 22% , more importantly you need to demonstrate critical thinking, business acumen as people want to see whether you can have a smart discussion over the company

 

All great comments so far. 

Personally, I think it's a tough one. I did this SaaS LBO case study, a full 3-statement with LBO features --- multiple debt tranches, cash sweep, rollover equity, option pool, dividend recap, etc. --- and with the b/s balanced and all formulas correct, somehow I ended up with a 9x MOIC over a 5-year horizon. It's obviously too high for pretty much any company, but it'd be really helpful if I have some SaaS specific knowledge (I don't have that much) to know if that number is not THAT weird.

The hypothetical Co. is a SaaS company who just started to generate revenue in transaction close year.

 

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