What do you do with transaction fees in an LBO model?
Hi all,
When solving a simple paper LBO model, how do you account for transaction fees? Let's say the EV is 1000 and you acquire the firm using 70% debt. Transaction fees are 50 and existing cash is 50. After 5 years cumulative FCFE is 200 and you can sell the firm for 1200. Is it correct that the cash multiple = (1200 + 200 - 700)/300 = 2.33? How do you account for the existing cash and the transaction fess in this kind of calculation?
Many thanks in advance,
Antoine
Your cash on cash multiple is correct.
You deal with the transaction fees and cash in the sources / uses.
Uses: Equity + Debt (1050), Min Cash (0) Sources: BS cash (50), Debt (700), Equity Check (300)
If you have a Min cash requirement or there isn’t enough BS cash to fund the fees, the sponsor has to write a bigger check. That 300 is the “plug” in the equation
Would personally break out uses between purchase of equity $1,000 and transaction fees $50, but yeah.
If $50 existing cash sits on BS then it Needs to be netted against debt at sale. However since min cash is 0 we assume it is used to fund transaction $50 costs instead of hit to equity.
Otherwise it would be (1200+200-700+50)/300 as cash on cash and at entry, the $50 transaction fee is taken out of equity pro forma balance sheet adjustment.
Why about fees at exit? (e.g. sell-side advisor/vendor due diligence fees etc.?)
New buyer pays for the fees out of shareholder equity if it’s transaction/advisory related. It’s an expense so erodes equity.
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