PE LBO modeling test for juniors
Hi Everyone,
I hope this isn't the wrong place for this question but I had a question regarding the mechanics of a LBO model test.
Assumptions:
- Purchase Enterprise Value 2000
- M&A fees: 2%
- Proportion of debt used 50%
- Coupon on debt 11% ****
- No debt principal repayment during year
- Exit 8x trailing EBITDA and EBITDA at year 6 = 250
- Exit after 6 years
- EBITDA growth YOY 6%
- Capex and D&A fixed as 20% of EBITDA
So the meat of my question comes when calculating MOM and IRR here. Given there is no debt pay down during the year, my thought process was:
Exit EV value = 8*250 = 2000
Net Debt on exit = 1000 - sum of FCF's from entry to exit (roughly 400) = roughly 600
Exit equity value = 2000 - Net Debt (600) = 1400
**IRR = (1400/1000+40)^(1/6)-1 **
Is the 40 dollar M&A fee included in IRR given it was likely paid with equity?
**MOM = 1400/1040 = roughly 1.4x **
If anyone could clarify this for me I would be hugely grateful.
Best,
IS
M&A fee would be subtracted from the target's retained earnings. When calculating Equity Value by subtracting Debt and adding Cash to the Enterprise Value, you'd subtract the M&A fee from the cash you're adding to the Enterprise Value. It would not be included in your IRR calculation.
So just to confirm, the M&A fee was an entry one with no M&A exit fee. Given on entry there was no initial company cash apart from the sources (investor equity and debt raised). Is this still not counted in IRR?
hmm not 100% sure NuclearPenguins
Thanks for your input and help!
Ok so assuming I'm interpreting everything correctly: Easiest way to think about it is sources and uses - you would add the M&A entry fee to your uses and need to account for having enough sources as well.
High level example:
$500M purchase price Funded 50% debt ($250M) Min cash $10M Txn Expenses $20M
Uses would be $500M + 10M + 20M = $530M Sources would be $250M debt, 280M equity (530M - 250M)
Say equity value is $600M at exit, then MOIC is 2.1x (600 / 280) and IRR is ~16.5% assuming 5 year hold (2.1^(1/5)-1)
On my phone so apologies if anything is messed up, but based on the quick skim I think OP did things correctly.
Edit: Flipped sources and uses originally.
Hey,
Thanks for this. According to you I think I did things correctly. Hoping to hear back this week with positive news in that case.
It has to come from somewhere so yes, it is included in IRR (be it in the numerator or denominator)
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