Sources and uses help!!

Please help me form the sources and uses of the below problems

The purchase price is 24mm at an EV/EBITDA of 7.5x
The management rollover equity is 15
The existing debt on the balance sheet is 1.5 and is repaid at the time of transaction
The PE firm is investing in the form of loan notes at a 10 percent coupon
Bank loan can be taken to fund the transaction
Last two have to be assumed

Comments (6)

Most Helpful
May 16, 2020 - 2:58pm

Happy to talk through / debate it with others. My understanding / assumptions:

  • EV is $24mm, no cash on balance sheet, $1.5mm of debt

  • No transaction costs associates with the transaction

Uses

  • Purchase of Equity: $22.5mm

  • Repayment of Existing Debt: $1.5mm

  • Total Uses: $24mm

Sources

  • Management Rollover Equity: $15mm

  • PE Sponsor Loan: $9mm

  • Total Sources: $24mm

Based on the above, I don't think you would need a bank loan, unless the sponsor does not want to give a loan that is $9mm in size. For example, if the sponsor were to give a max loan of $6mm, you could take out a bank loan that is $3mm to reach $24mm of total sources to do the transaction. Also, uses could be increased by transaction costs. In that case, a larger sponsor loan or bank loan could be used to pay those costs.

May 18, 2020 - 3:01pm

Agree with the above solution. Couple of remarks:
- You state purchase price --> that is a synonym for equity value. However in the same sentence you talk about EV/EBITDA --> Enterprise value. Make a clear distinction between the two.
- Above solution makes the PE a mezzanine provider, with a capped upside (max 10% IRR, no equity upside). Most PEs would want control and equity upside. In that case the bank financing also is interesting as it lowers the equity check while maintaining the equity upside.

May 19, 2020 - 4:31am

In the case at hand, the sale makes no sense. Owners could most likely raise (9-1.5)=7.5m debt from a bank at much lower cost or combine it with some sort of subordinated debt element if they make 3.2m EBITDA. This is not a typical PE deal where owners sell majority, PE raises 3-5x leverage, etc.

May 19, 2020 - 4:41am

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