Sources & Uses - Private Co LBO

Question

Hi guys,

Was going through old posts and got tripped up on this one. Hoping someone could help clarify a bit:

Given purchase price of $33,000 (owner must pay off existing debt), current cash on balance sheet of $175 and debt on balance sheet of $12,602.

Financing assumptions: senior debt of 2.5x EBITDA (at EBITDA of $6,420, implies $16,050) and mezz debt of 1x EBITDA ($6,420), owner retains 15% of remaining equity.

This answer below was the answer that people seem to agree on, but I am very confused why the Equity is $20,398 and not $20,573.

PerryPassu · Accepted Answer

You're not wrong, you're just approaching it from a valuation perspective. When you're doing Sources & Uses you are not trying to value the Company - you're structuring a new transaction to buy the Company.

The prompt has done the valuation work for you and has told you what we are going to pay for the Company - it's 5.14x EBITDA ($6,420 x 5.14 = $33,000).

PerryPassu · Answer

W/ Gross Debt S&U will be $33,600, W Net Debt $33,425

Would be very careful here, you said Sponsor Equity check but I think you mean the purchase price of equity. The new cash equity from the Sponsor is the same either way which is why it doesn't matter how you show this part.

If you show it as net debt you are assuming that before you bought the Company it used all its cash to pay off its own debt. If you show gross debt and show the cash as a source you assume you buy the Company with cash on its balance sheet. Either of these are illustrative.

Prøps · Answer

I agree that the method discussed here is accurate and would be easier to look at from this point of view - where you use cash on balance sheet as as source and refinance gross debt. I guess what is in contention (here and in the other thread) is what constitutes the equity purchase price and whether it is done so on a cash-free/debt-free basis.

You need to decide if 33,000 is the enterprise value of equity value of the transaction - if 33,000 is done so on a debt-free/cash-free basis then I am inclined to say that this is in fact the "equity value"

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Sources & Uses - Private Co LBO

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Sources & Uses - Private Co LBO

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