LBO Model - Long Form Template Description The Macabacus long form LBO model is derived from actual LBO models used by four bulge bracket investment banks, incorporating the best practices and features of each. However, bank debts come with covenants and limitations that restrict a company from paying dividends to shareholders, raising additional bank debts, and acquiring other companies while the debt is active. Free Cash Flow Projection Revenue and EBITDA Operating Assumptions Net Income Free Cash Flow (Pre-Revolver) Step 4. List of Excel Shortcuts It is recommended to start on the Uses side and then complete the Sources side afterward since you need to figure out how much something costs before thinking about how you will come up with the funds to pay for it. If there is a shortage of cash, the revolver balance will rise this balance will be paid down once there is a surplus of cash. The model will calculate both the levered and unlevered rates of return to assess how big the advantage of leverage is to the private equity firm. Since $400mm was raised in Term Loan B and $200mm was raised in Senior Notes, we can multiply each by the 2% financing fee assumption and sum them up to arrive at $12mm in financing fees. 2. The revolver sits at the very top of the debt waterfall and has the highest claim on JoeCos assets if the company were to be liquidated. $400mm equity + $750mm debt = $1.150B, so the purchase multiple is $1,150 / $250 = 4.6x. Upon receipt of the prompt, the candidate will build an LBO model using the assumptions provided to calculate the return metrics, i.e. The debt can be raised in the public debt market or private institutional market. These are the two levers from above: Value Creation = Change in Enterprise Value + Debt Paydown. We saw how with the TLB, the interest expense (i.e. As stated in the prompt, D&A will be 2% of revenue, Capex requirements are 2% of revenue, the change in NWC will be 1% of revenue, and the tax rate will be 35%. Note: To download the Excel template that goes with this video, go to http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-simple-lbo-model/In . It shows that we can easily estimate the likely return on investment of the different parties involved in the deal. To start, we will create three line items: For example, if JoeCo has drawn $10mm to date, the beginning available revolver capacity for the current period is $40mm. Learn accounting, 3-statement modeling, valuation, and M&A and LBO modeling from the ground up with 10+ real-life case studies from around the world. Since this deal is structured as a cash-free debt-free transaction (CFDF), the sponsor is not assuming any JoeCo debt or getting any of JoeCos excess cash. It can be switched on under Excel options / formulas / then check the box "Enable iterative calculations". Rosenbaum and Pearl have responded to this need by writing the book that they wish had existed when they were trying to break into Wall Street.Rosenbaum and Pearl originally responded to this need in 2009 by writing the first edition of the book that they wish had existed when they were trying to break into Wall Street.BIWS Premium lets you gain advanced-level knowledge via video-based . If you don't receive the email, be sure to check your spam folder before requesting the files again. The only expenses remaining from Pre-Tax Income (EBT) are the taxes paid to the government. optional repayments using excess FCFs), but this was excluded in our basic model. marlin model 60 trigger guard; kobo vtuber. Subtract Depreciation of $35mm per year, and interest of $75mm per year. One characteristic of these Senior Notes is that there will be no required principal amortization, meaning the principal will not be paid until maturity. You need to activate "iterations" in Excel for this LBO model to work properly. 2. 2022 Wall Street Prep, Inc. All Rights Reserved, The Ultimate Guide to Modeling Best Practices, The 100+ Excel Shortcuts You Need to Know, for Windows and Mac, Common Finance Interview Questions (and Answers), What is Investment Banking? Mezzanine debt takes the form of a high yield debt with an option to purchase a stock at a specific price in the future as a way of boosting investor returns commensurate with the risk involved. During a liquidation, mezzanine debt is paid after other debts have been settled, but before equity shareholders are paid. Includes ALL the courses on the site, plus updates and any new courses in the future. Link to the figure you want to calculate in the top-left corner of the table, and then highlight the whole table and press Alt + D + T or Alt + A + W + T to calculate the entire range of values. For the last debt instrument used, the PE firm raised 2.0x in Senior Notes that carries a seven-year maturity and an 8.5% coupon rate. It is often financed by hedge funds and private equity investors and comes with a higher interest rate than bank debt and high-yield debt. Revolver, TLs) and usually unsecured despite the name. In this follow-up LBO Valuation tutorial, youll learn how to use an LBO model for valuation purposes, and how to tweak the model so that you can use built-in Excel functions such as Goal Seek to value companies. Since our model is less complex with no other proceeds (e.g. Both the assets of a company being acquired and those of the acquiring company are used as collateral for the financing. Answers should be rounded to the nearest whole number, comma separating 000s,. Once you have inputted the revenue growth rate and EBITDA margin assumptions, we can project the amounts for the forecast period based on the formulas below. For the financing fees amortization, we can compute this by dividing the total financing fee ($12mm) by the tenor of the debt, 7 years doing so will leave us with ~$2mm each year. Finally, the instructions here state that senior debt should be maintained in the IPO exit, so we assume that only the Second Lien and PIK Loan are repaid. This resulting valuation can be used to Most PE deals are structured as cash-free debt-free. Thanks a lot! The borrower, JoeCo, is legally required to pay down debt tranches in a specific order (i.e. by JL Valuation & Modeling. If you're lost, part one is here. Thanks a lot for your help and great tutorial! priced at a floating rate), meaning that the interest rate paid on these debt instruments fluctuates based on LIBOR (London Interbank Offered Rate), the global standard benchmark used to set lending rates. Setting Up Sensitivity Tables The following Short-Form LBO Model tutorial will walk through building a simple LBO model step-by-step in Excel, with a template provided. Taxes = $140mm * 40%, so Net Income = $140mm $56mm = $84mm. Cash Flow & Payment Schedule LBO Model Template Features Summary:-Includes a comprehensive guide about the LBO model template-Calculates the MoIC and IRR of the investment-Full print ready-Informational notes included-No installation needed, ready to use-Works both on Mac and Windows-Compatible with Excel 2010 and later versions - The associated video will help you to master the model, step-by-step. The following LBO model test is an appropriate place to start to ensure you understand the modeling mechanics, particularly for those starting to prepare for private equity interviews. First, you need to reduce the purchase assumption and exit assumptions to single cells, ideally an EBITDA multiple for both, or perhaps a premium to the current share price for the purchase assumption. Targeted MOIC = 3.0x so the PE firm would have to invest $400mm in the beginning. To calculate the FCF, we will first add back D&A and the Amortization of Financing Fees to Net Income since they are both non-cash expenses. Jan. 31 2022, Published 10:41 a.m. Save Save LBO excel Model For Later. If the revolver remains undrawn throughout the entire duration of the holding period, the interest paid will be zero. The two senior secured debt tranches, the Revolver and Term Loan B are priced off LIBOR + a spread (i.e. Now that we have determined how much the firm needs to pay and the amount of debt funding, the Sponsor Equity is the plug for the remaining funds needed. Simple LBO Model Steps 1. The multiple-on-invested-capital (MOIC), or cash-on-cash return, is calculated as the total inflows divided by the total outflows from the perspective of the PE firm. As a side note, one common feature in LBO models is a cash sweep (i.e. Heres how we interpret each line in this case study and use it in the simple LBO model: OpCo currently has EBITDA of $250mm, and ABC believes that the new management team could keep EBITDA flat for the next 5 years.. The share price may also fluctuate, so the firm may end up with a stake that is worth more or less in future years. The debt schedule is arguably the trickiest part of the LBO Modeling Test. After the acquisition, the debt/equity ratio is usually greater than 1-2x since the debt constitutes 50-90% of the purchase price. Also in the CFS section, CapEx = $35mm per year, and Depreciation also equals $35mm per year since the PP&E balance does not change at all. - The Model was built to be used even by newcomers to the world of finance and accounting. In an IPO exit, you assume that only part of the firms stake is sold initially, and that the rest is sold over time. Short-Form LBO Model Tutorial [Four-Part Video Series]. the proceeds to the lender) decreases as the principal is gradually paid down. Enroll Today: Learn LBO Modeling and become a stronger Private Equity professional. In the final step before arriving at FCF, we will deduct the mandatory debt amortization associated with the Term Loan B. Thus, a leveraged buyout is an accepted . more cash than net income showed). In step 3 there is already interest expense, how is that possible? To learn more about. Therefore, we need to work our way down from EBITDA to net income (the bottom line), meaning the subsequent step is to subtract D&A from EBITDA to calculate EBIT. These models typically project five or more years of future cash flows and discount those cash flows back to the present value. Welcome to Wall Street Prep! Then, to calculate the interest expense we take the TLB interest rate and multiply it by the average of the beginning and ending TLB balance. In terms of model complexity, a single-sheet LBO with 200-300 rows in Excel is fine for this exercise. prepayment using excess FCF is not allowed). www.stantonparkllc.com This Best Practice includes 1 Excel Model, 1 Step-by-Step Explanatory Video operating assumptions) grouped together in the same section near the bottom. If the company defaults on payments, the equity shareholders may not receive any returns on their investments. Estimate IRR based on the MoM multiple. Is it a real cash out flow? Finally, your IRR and CoC multiple cells should stay in the same position regardless of the exit year. Moving onto the next tranche in the waterfall, the Term Loan B will be forecasted in a similar roll-forward but this schedule will be simpler given our model assumptions. 1. On the simplified CFS, Net Income = $84mm, Depreciation = $35mm, Change in Working Capital = $6mm, CapEx = ($35mm), so Cash Generated per year = $90mm. Click HERE. The interest rate is calculated as LIBOR plus the spread, + 400. They have less restrictive limitations or covenants than there are in bank debts. In this LBO Model tutorial, youll learn how to build a very simple LBO model on paper that you can use to answer quick questions in PE (and other) interviews. 2. Step 1 - Enter Deal Value Step 2 - Enter historical financials Step 3 - Forecast period In contrast, all-cash inflows are inputted as positives. While the EBITDA margin was not explicitly stated in the prompt, we can divide the LTM EBITDA of $100mm by the $1bn in LTM revenue to get a 10% EBITDA margin. Why are we adding back the amortization of financing fees? Due to the high degree of leverage used in the transaction, the IRR to equity investors will be much higher than the return to debt investors. LBO Report 3. You should always START this exercise by looking at the actual question or set of questions they are asking you: Calculate the purchase price required for ABC Capital to obtain a 3.0x multiple of invested capital (MOIC) if it plans to sell OpCo after five years at an EV / EBITDA multiple of 6.0x., So, theyre giving you the exit multiple and the return on investment that the PE firm is targeting, and you have to figure out the initial purchase price by working backwards.. We will now outline how the PE firm came up with the necessary funds to meet the cost of purchasing JoeCo. LBO means " L everaged B uy O ut." Two main characteristics differentiate LBOs from other types of acquisitions: Instead of a "corporate" buying another "corporate," e.g., Amazon buying Whole Foods, in a LBO, a Financial Sponsor (a.k.a. winchester rifle value serial number; university of minnesota duluth campus map; netnaija 2012 movies. Once we link the interest expense back into the FCF forecast, aCircularity will be introduced into our model. As a general modeling best practice, it is recommended to place all the drivers (i.e. Mezzanine debt is a small middle layer in the LBO capital structure that is a hybrid of debt and equity and is junior or subordinate to other debt financing options. Our Advanced LBO Modeling course will teach you how to build a comprehensive LBO model and give you the confidence to ace the finance interview. We are now at Operating Income (EBIT) and will subtract Interest and the Amortization of Financing Fees. To learn more about. To take a step back, the purpose of creating this debt schedule is to keep track of JoeCos mandatory payments to its lenders and assess its revolver needs, as well as calculate the interest due from each debt tranche. You're not going to get "extra credit" for a super-complex LBO model that takes days to understand. Assume for each year that JoeCos 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%. Bhaskar Shanmugam. This website and our partners set cookies on your computer to improve our site and the ads you see. If a line item has Less at the front, confirm that it is shown as a negative outflow of cash, and vice versa if it has Plus in front. You can use Goal Seek (Alt + A + W + G) to determine how much a private equity firm could pay for a company, if it exits at a specific multiple and is targeting a specific IRR or cash-on-cash multiple. 2022 Wall Street Prep, Inc. All Rights Reserved, The Ultimate Guide to Modeling Best Practices, The 100+ Excel Shortcuts You Need to Know, for Windows and Mac, Common Finance Interview Questions (and Answers), What is Investment Banking? The following Short-Form LBO Model tutorial will walk through building a simple LBO model step-by-step in Excel, with a template provided. Value Creation = Exit Equity Value - Equity Invested. Although each LBO is structured differently, the capital structure is usually similar in most newly-purchased companies, with the largest percentage of LBO financing being debt. The approximate interest expense is ~$23mm in 2021 and falls to ~$20mm by 2025. Now that we have calculated the interest rate, we can multiply it by the average of the beginning and ending revolver balance. LBO Structuring and Valuation Model Overview Objectives: Develop a model capable of simulating Both the assets of a company being acquired and those of the acquiring company are used as collateral for the financing. Taxes = $140mm * 40%, so Net Income = $140mm - $56mm = $84mm. Work with us to turn it RED. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The Beginning Balance figure cannot turn negative as that would imply that JoeCo paid down more of the revolver balance than it had borrowed (i.e. The only factor that impacts the ending TLB balance is the scheduled principal amortization of 5%. Tl;dr: A simple LBO template excel model to review the opportunity in acquiring a company with debt. 0 ratings 0% found this document useful (0 votes) 3K views 6 . Although the Revolver has no floor, it is a good habit to put the LIBOR rate in a MAX function with the floor, which is 0.0% in this case. The acquiring firm determines if an investment is worth pursuing by calculating the expected internal rate of return (IRR), where the minimum is typically considered 30% and above. Model Assumptions Entry Valuation Transaction Assumptions Debt Assumptions Step 2. In this case, the revolver was left undrawn, and the beginning balance is thereby zero. The LBO Model Test refers to a common interview exercise given to prospective candidates during the private equity recruiting process. The amount of debt that a lender has provided is expressed as a multiple of EBITDA (also called a turn). Blue-chip company Citrix Systems, Inc. (CTXS) has finalized a deal to sell its operation to a pair of private equity firms. Click here to get the case study prompt, and here to get the Excel file. Thank you for reading CFIs guide to an LBO Model. With the entry valuation and transaction assumptions filled out, we can now list out the debt assumptions related to each debt tranche, such as the turns of EBITDA (x EBITDA), pricing terms, and amortization requirements. As you can see below, the interest expense is $17mm each year, and the lender receives an 8.5% yield on the $200mm outstanding balance for the entire tenor. This tells you to make the initial EBITDA $250mm and keep it at that level for 5 years skip revenue, COGS, OpEx, and everything else because none of that matters if this is all they give you: ABC Capital has obtained debt financing of $750mm at 10% interest, and OpCo expects working capital to be a source of funds at $6mm per year.. For example, if the required amortization was 20% per year and the holding period was 6 years, without this function in place JoeCo would still be paying the mandatory amortization in year 6 despite the principal being fully paid off (i.e. For instance, we can see $400mm was raised in Term Loan B as the amount was 4.0x EBITDA. LBO Report 3. The Impact of Tax Reform on Financial Modeling, Fixed Income Markets Certification (FIMC), The Investment Banking Interview Guide ("The Red Book"), Illustrative LBO Model Test Prompt Example, confidential information memorandum (CIM), highest priority in the case of bankruptcy, Purchase Enterprise Value = LTM EBITDA Entry Multiple, Debt Amount ($ Amount) = Debt EBITDA Turns LTM EBITDA, Financing Fees ($ Fee) = Debt Amount % Fee, Sponsor Equity = Total Uses (Revolver + Term Loan B + Senior Notes Amounts), Total Sources = Revolver + Term Loan B + Senior Notes + Sponsor Equity, Total Uses = Purchase Enterprise Value + Cash to B/S + Transaction Fees + Financing Fees, Revenue = Prior Revenue (1 + Revenue Growth %), Free Cash Flow (Pre-Revolver) = Net Income + Depreciation & Amortization + Amortization of, Financing Fees Capex Change in Net Working Capital Mandatory Amortization, Amortization of Financing Fees = Financing Fees Amount Financing Fees Amortization Period, EBT (aka Pre-Tax Income) = EBIT Interest Amortization of Financing Fees, in NWC = ( in NWC % of Revenue) Revenue, Free Cash Flow (Pre-Revolver) = Net Income + D&A + Amortization of Financing Fees Capex in NWC Mandatory Debt Amortization, If the toggle is switched to 1, then the average of the beginning and ending balance will be taken, If the toggle is switched to 0, then a zero will be output, which removes all the cells populated with #VALUE (and can be toggled back to use the average), Available Revolver Capacity = Total Revolver Capacity Beginning Balance, Revolver Drawdown / (Paydown): =MIN (Available Revolver Capacity, MIN (Beginning Revolver Balance, Free Cash Flow Pre-Revolver), Revolver Interest Rate: = MAX (LIBOR, Floor) + Spread, Revolver Interest Expense: IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Revolver Balance), 0) Revolver Interest Rate, Revolver Unused Commitment Fee: IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Available Revolver Capacity), 0) Unused Commitment Fee %, Term Loan B Mandatory Amortization = TLB Raised TLB Mandatory Amortization %, Term Loan B Interest Rate: = MAX (LIBOR, Floor) + Spread, Term Loan B Interest Expense: IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending TLB Balance), 0) TLB Interest Rate, Senior Notes Interest Expense = IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Senior Notes), 0) Senior Notes Interest Rate, Interest = Revolver Interest Expense + Revolver Unused Commitment Fee + TLB Interest Expense + Senior Notes Interest Expense, Exit Enterprise Value = Exit Multiple LTM EBITDA, Debt = Revolver Ending Balance + Term Loan B Ending Balance + Senior Notes Ending Balance, IRR: = XIRR (Range of Cash Flows, Range of Timing), MOIC: =SUM (Range of Inflows) / Initial Outflow. Moving onto the columns on the right, the Rate and Floor are used to calculate the interest rate of each debt tranche. On the other hand, if the Free Cash Flow (Pre-Revolver) is the lesser value of the two, the revolver will be drawn from (as the two negatives will make a positive). Get instant access to video lessons taught by experienced investment bankers. An LBO model is usually built in Excel to help investors properly evaluate the transaction and realize the highest possible risk-adjusted internal rate of return (IRR). In this tutorial we are going to learn how to build assumptions & input sheets in our excel financial model. Instructions: Questions 1-4 use the financial model on tab Q1-4 in the Exam Workbook. Again, JoeCo can borrow at most up to the Available Revolver Capacity. In the event of a liquidation, high yield debt is paid before equity holders, but after the bank debt. On JoeCos balance sheet, there is $200mm of existing debt and $25mm in cash, of which $20mm is considered excess cash. The long-form LBO model presented here is derived from the actual LBO models used by four bulge bracket investment banks and a model created by John Burns widely available on the web. Roll-forwards refers to a forecasting approach that connects the current period forecast to the prior period: This approach is very useful in adding transparency to how schedules are constructed. Our free cash flow projection model is now complete with those two final linkages made. Complete the model by filling in the blank cells before answering the question below. Cash Flow & Payment Schedule LBO Model Template Features Summary:-Includes a comprehensive guide about the LBO model template-Calculates the MoIC and IRR of the investment-Full print ready-Informational notes included-No installation needed, ready to use-Works both on Mac and Windows-Compatible with Excel 2010 and later versions The formula would change in that LIBOR (Cell F$73 in this case) will be divided by 10,000. Based on the content of this tutorial, our recommended Premium Course Upgrade is Get the Excel & VBA, Financial Modeling Mastery, and PowerPoint Pro courses together and learn everything from Excel shortcuts up through advanced modeling, VBA to automate your workflow, and PowerPoint and presentation skills. . While debt paydown is simple to measure (that's what the LBO model tracks), the change in . With all of this set up, the rest of the case study questions are straightforward to answer: just use Goal Seek to determine the appropriate purchase/exit multiples, EBITDA margins, or revenue growth rates. 100+ Excel Financial Modeling Shortcuts You Need to Know, The Ultimate Guide to Financial Modeling Best Practices and Conventions, Essential Reading for your Investment Banking Interview, The Impact of Tax Reform on Financial Modeling, Fixed Income Markets Certification (FIMC), The Investment Banking Interview Guide ("The Red Book"), Sources & Uses Table and Financial Forecast [Part 2 of 4], Cash Flow Statement and Debt Schedule [Part 3 of 4], Exit Assumptions and Returns Schedule [Part 4 of 4]. You will then get a solution that indicates the multiple the PE firm could pay to achieve the returns they are targeting.
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