Got asked the following for PE interview:
You are a PE firm that wants to buy a company. You offer 120m for the company, however the target wants 130m for it. The problem is that you cant put any more equity and the banks wont lend you anything more. The target then offers to LEND you the extra 10m so that an agreement is reached.
Is this a good deal?
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I think as long as the interest you have to pay on the 10m still allows your firm to make a target range IRR, then it's fine.
No. Look at the sale of Anheuser-Busch InBev's Eastern and Central Europe assets.
Should raise questions:
a) If the other party is willing to walk away from $10 million now to get the deal done, with potential future upside, are they actually just willing to adjust downwards anyway?
b) It indicates they want the deal to get done and don't have other bidders.
c) http://www.theprivateequiteer.com/vendor-financing-example/
I would say that it lowers the value of the company because it decreases the liquidity of its assets. Instead of having 10m in cash on its balance sheet, it now has 10m of loans. The importance of this loan would be determined by that company's need for liquidity.
This is a promisary note. You're not losing/gaining cash. Regular (non-public) businesses are transacted like this everyday. A $30M apartment complex is sold for $25M Cash and $5M promissory note to be paid in the next 3 years.
The above answer saying as long it allows the target IRR is the correct answer. You should say something like "assuming the terms of the loan are fair and it still allows the target IRR to be realized, than yes, go for it."
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