Weird technical interview - who was right?

Hey guys,

I had the weirdest technical interview a few days ago and wanted to check with you whether I got it right.

The interviewer told me that the business had 50mm EBITDA and was trading at 10x, with max leverage 225mm. He asked me what would be the equity check. I said 500-225=275 (ignoring fees). He then asked whether that's it or I should think about smth else. I said if we ignore advisory and debt fees and cash on BS, then yes - equity check should be 275mm. He replied that there are more things to adjust for and aksed what EV adjustments I know. I said I know 6: pref stock, pensions, NCI, leases, associates, and non-core assets: EV=debt-cash+equity+prefs+NCI+leasing+pensions-associates-noncore assets. He then said that this company has 50mm associates and 75mm NCIs. I said I don't care because I have my EV which is 500 and the equity check is just depending on what is my preferred debt to equity split. He said no and added that 50mm of associates had to be added to the equity check 275+50=375, while there was no adjustment needed for NCI as it was already included in the equity check.

Now I am very confused as firstly I've never heard about adjusting purchasing price for associates, and also if that was the case - why didn't we adjust for NCI as it is also part of EV?

Please help me understand what answer was right in the end! Thanks

P.S. To summarise: EBITDA=50mm, EV/EBITDA = 10x, associates=50mm, NCI=75mm, max debt=225mm. Please compute equity check.

Comments (19)

Oct 19, 2020 - 3:46pm
EnterpriseSoftwareLBO, what's your opinion? Comment below:

Your interviewer was. Don't beat yourself up though. Just remember for your next interviewer to not just memorize formulas but also understand conceptually what is going on.

Answer as you said would be: EV - debt + associates = 500 - 225 + 50 = 325

To your question:

There is an assumption that you guys never really discussed. Are you just selling the enterprise value (core operations of the business, like an asset sale) or are they selling their equity stake. Your interviewer was assuming that it was an equity sale and that everything related to the business was to be sold. 

Therefore, you are not just selling the EV (which includes NCI, but not associates) but also the equity value (which includes associates). Therefore we need to trim our check up to include the associates. Because if we didn't they would just be giving things like associates to us for free when they sold their equity. We need to pay for both the enterprise value (assume we refinance the other liabilities and equity claims) and the equity value. So anything that is subtracted out of EV to get to equity value needs to be added back to the transaction consideration.

Hopefully that makes sense. Feel free to reply and I can help clarify anything.

Oct 19, 2020 - 4:03pm
EnterpriseSoftwareLBO, what's your opinion? Comment below:

No because you subtract those things out form Enterprise Value, and if you are buying the equity you need to pay for them too

Your Formula: EV = debt-cash+equity+prefs+NCI+leasing+pensions-associates-noncore assets

Rewriting for Equity Value: Equity = EV - debt - prefs - NCI - leasing - pensions + associates + noncore assets + cash 

I think you get the gist, but just to add as a reference.

Why do we make those adjustments? 

We add debt, pensions etc. to Enterprise Value because the equity value of the company doesn't own them, but they have claims to the core operating business so we need to include to properly include everyone who has a claim

We subtract associates, noncore assets, and cash because they are things the equity value (for simplification) owns that are not included in our core operating business. So if we are buying the equity we are also buying all their claims to things tangential to the business: excess cash, associates, non-core assets etc. we thus need to add it back in as we removed them from the enterprise value

Its the same reason we typically include a working capital peg - so that the equity doesn't run away with all of the cash and liquid assets if we are paying them for them

That help?

Most Helpful
Oct 19, 2020 - 8:09pm
laka, what's your opinion? Comment below:

Shouldn't think about one thing being included in the other. Everyone's taught to think in terms of EV being the largest basket and then equity value being a part of it or included. That's because usually companies have a positive net debt.

But later on, the more appropriate way is to distance yourself from thinking of carving out one value in another. Better to think of it as ownership or financing claims to entities or assets.
EV: EV is core business. It would be good if you just had a number for EV but you're given some values and have to solve for it instead. So say you're given inputs of equity value, debt, and investment in associates. You know that part of that equity value and (by default, assume all of the) debt comprise the EV value (core business). In order to get the EV itself, subtract out the part of equity value that is invested in associates. Hence EV = (Equity - Associates) + Debt. This is most easily understood as thinking what on the financing side equates to the assets (application of A = L + E balance sheet equation).

Say you wanna find Equity Value instead. Well you know your equity value is a form of ownership/financing. What do you own/finance? Part of the EV (core business) and some non-core business assets (your associates). So the starting point is EV. Then you've got to strip out the debt financing claim to the EV to get your equity financing claim to the EV. But that's only part of your total equity pie. Hence, add the associate equity to this EV - debt figure to get your total equity pie. Equity = (EV - debt) + Associate. 

Suppose we now add in NCI. NCI is the part of the core business' sub that the core business' equityholders/main equity in the capital structure (call this A) do not own. As a result, if you wanted to find the A, or the core business' equityholder's total equity, you'd have to subtract NCI from EV along with debt and add associates. But if you want total related equity in question (this is A + NCI), then you'd keep NCI within the EV (not subtract it out). As a result you have an "equity value" (A + NCI) that is comprised of multiple people's holdings, and the equation is Total Related Equity (A + NCI) = EV - Debt + Associates. And this is the value that your interviewer was looking for. But he/she was very ambiguous about it, as were possibly a few of the other responses above.

I believe thinking about what are the assets and the financing claims in relation to them is the best way to tackle all these interview questions logically to avoid trip-ups. 


  • 6
Oct 20, 2020 - 9:57am
monkey123456789, what's your opinion? Comment below:


In LBOs  (if associates are not sold off prior to transaction and treated as cash): should you therefore always include them in the "Uses" part of the S&U? Or is it "better" to just not subtract associates when going from offer equity value to offer EV? I have never seen associates as part of S&U in an LBO model..  

Oct 20, 2020 - 1:34pm
Je-ne-sais-pas, what's your opinion? Comment below:

Could you describe what type of PE firm you are interviewing for where this came up? Strategy / rough AUM size would be appreciated to help gauge how difficult they are!

  • Analyst 3+ in IB-M&A
Oct 21, 2020 - 3:39am

It was a family office. From my experience - the smaller the team (like here) the more difficult the interviews as they need someone who can work independently and doesn't need any training - plug and play basically. With larger funds it may sometimes be easier, although at larger funds there is a larger competition, too. To sum it up - if you want to move to the buyside you better get the fundamentals of corporate finance like these perfectly clear and practice as much as you can. Like for example I thought questions around EV couldn't kill me as I got it all and I was practicing how to treat IFRS16 leases in 3 statements instead - and then I get killed by a basic EV queston....

  • Associate 1 in PE - LBOs
Oct 21, 2020 - 6:09pm

Hey -- I haven't read the responses above, but I think your response was lacking in some ways. Here's what I would have said: 

1) Nobody is going to sell you a business at current trading multiple of 10x. There needs to be some premium baked in. So I would have said let's assume a 12x EV / EBITDA entry multiple
2) Max leverage that the sponsor can take on is to fund the transaction irrespective of the current leverage the target has as the latter will determine the proceeds to the seller (not the former). You could have said I am going to assume a $100 in debt as founders / owners generally run businesses conservatively 
Now, as you think about your proceeds to equity, that would be determined by the EV equation, which you're already familiar with  
3) NCIs are usually assumed on the balance sheet (not paid off), so they wouldn't affect the equity cheque; but on the other hand, associates are paid off as they are considered non-core
4) So, as you think of the equation below...your equity proceeds would be somewhere around 525 (600 - 100 + 25)  
EV = Eq + Net Debt + NCI - Associates
 5) Your Sources and Uses would look like 
Purchase of Equity 525 
Purchase of Debt 100
Total = 625
Sale of Associates 25 
Max Leverage 225 
EQuity cheque 375 

That's what I think 

  • VP in PE - LBOs
Oct 29, 2020 - 5:10am

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