WSO Basic LBO Model #1
All,
Thanks for the help here. I've recently been going through the basic lbo models that WSO has as part of its prep package. One thing I am really confused about is the way they put minimum cash required to operate as a "Use of Cash" in the uses of cash section. Is this best practice for how one goes about modeling a minimum cash balance required in an LBO?
Secondly, I am also struggling with their formula for debt paydown in the debt schedule. The video tutorial is quite useless as even the person doing the tutorial makes several mistakes around this part that adds to the confusion. The formula they use is as follows:
=Min(Max(-BOP Bank Debt, -LCF-(BOP Cash-Min Cash)),0)
Can anyone explain this? I'm having a pretty hard time understanding this formula. Let me know if additional context is required to answer this question.
Thanks!
MultipleExpansion.com has been making the rounds recently and IMO is the best free LBO resource I've seen.
I haven't done the lbo model you're referring to, but typically you subtract mincash from cash flows and add it back to the end. This is so you don't "spend" all of the balance sheet cash on paying down debt or Capex, and keep the necessary cash on hand to keep running the company. Subtracting it just automatically stashes the required amount in the cookie jar for later. Make sense?
Intuitively I understand that that's what you have to do with Mincash (subtract it so that we "stash" it), but in the equation above, are we not adding Min Cash?
Think it may be the signs that are confusing me. Could you elaborate any more? Thank you for all the help by the way.
Yeah the formula you have above looks confusing. Check out multipleexpansion.com. Pretty clean template.
Let's break up the formula above...
Max(-Beginning debt, - (LCF + Beginning cash - Mincash)
Since it's max of a negative number, take whichever is "smaller" / closer to 0.
Then you're taking "min" of that and 0. This just ensures that your debt pay down can't be > 0, which makes sense. Debt pay down should always be "negative" outflow of cash.
Again, I think this is a confusing way to lay it out, and having made many of these, it took me a couple minutes to figure out what they were doing.
What is IMO?
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