FIN 421 SEU Basic LBO Model Worksheet

FIN 421 SEU Basic LBO Model Worksheet

FIN 421 SEU Basic LBO Model Worksheet

A private equity firm is considering the leveraged buyout of Wakaf, a privately-owned coffee company. In the last twelve months (“LTM”), Wakaf generated $500 mn in revenue and $100mm in EBITDA. If acquired, the PE firm believes Wakaf’s revenue can continue to grow 12% YoY while its EBITDA margin remains constant.

To fund this transaction, the PE firm obtained 5.0x EBITDA in Term Loan B (“TLB”) financing – which will come with a six-year maturity, 7% mandatory amortization, and priced at LIBOR + 450 with a 3% floor. Packaged alongside the TLB is a $50mm revolving credit facility (“revolver”) priced at LIBOR + 400 with an unused commitment fee of 0.25%. For the last debt instrument used, the PE firm raised 3.0x in Senior Notes, which carries a seven-year maturity and an 8.5% coupon rate. The financing fees were 2% for each tranche, while the total transaction fees incurred were $10mm.

On Wakaf balance sheet, there is $50mm of existing debt and $25mm in cash, of which $20mm is considered excess cash. The business will be delivered to the buyer on a “cash-free, debt-free basis”, which means the seller is responsible for extinguishing the debt and keeping all the excess cash. The remaining $5mm in cash will come over in the sale, as this is cash that the parties determined is required to keep the business operating smoothly.

Assume for each year that Wakaf’s depreciation & amortization expense (“D&A”) will be 2% of revenue, capital expenditures (“Capex”) requirement will be 2% of revenue, the change in net working capital (“NWC”) will be 1% of revenue, and the tax rate will be 35%.

If the PE firm were to purchase Wakaf at 10.0x LTM EV/EBITDA on 12/31/2023 and then exit at the same LTM multiple after a five-year time horizon, what would the implied IRR and cash-on-cash return of the investment be?

FIN 421 SEU Basic LBO Model Worksheet

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