LBO – Operating Model, M&A Adjustments & 3-Statements

• Transaction value including dilution from stock options
• Sources and uses using Debt to EBITDA multiples for financing structure
• Modeling alternative financing structures
• Goodwill on acquisition and acquisition balance sheet
• Building the operating model
• Building the cash flow statement and balancing the balance sheet:
• Calculate debt and interest:
• Estimate the IRR
• Evaluation of the deal and issues that should be highlighted at investment committee

LBO – Detailed Financial & Return Structure and Special Topics

LBO – Detailed Financial & Return Structure

• Sources and uses of funds at entry
  • Complex capital structure including multiple debt tranches including high yield bonds, mezzanine finance (PIK) and shareholder loans (PIK).
  • Managing different financing scenarios within a model
• Full operating forecast
  • Cash sweep modeling
    • Minimum cash balance covenant
    • Revolver
    • Mandated and accelerated repayments
  • Test on interest expense cap as a percentage of EBITDA
  • Calculating debt ratios for testing financial covenants e.g. DSCR, Debt to EBITDA and Interest coverage
• Calculating the returns for the different providers of capital e.g. sponsor, management and mezzanine:
  • Disaggregating returns into their drivers (building the returns bridge)

LBO – Special Topics

• Asset vs stock purchase
• Tax deductibility of goodwill
• Section 338 elections
• Dividend recapitalizations
• Net working capital adjustments / peg
• Tax deductibility of interest expense

Private Company Forecasting and LBO Analysis

Part 1 – Operating Model
Based on a private company CIM the participants will build a detailed forecast financial model for a private company. This model will include the following:

• A detailed revenue build using a bottom-up approach using volume and price analysis for multiple product lines. Different margins are used for each product
• A detailed SG&A build
• Forecast of working capital
• The breakdown of capex, between maintenance and expansion capex

Part 2 – Valuation and Debt Structuring

• Recap on relative and absolute valuation approaches
• Overview of debt capacity calculations
• Based on the historic and forecast EBITDA and cash flows, we will estimate an appropriate acquisition valuation and debt structure for a potential LBO

Part 3 – LBO Model
Using one of the templates used earlier in the program evaluate the target company as a potential LBO target by incorporating:   

• An acquisition valuation range;
• A proposed debt structure; and
• The full operating model built earlier in the day

At the end of the program the instructor will act as the investment committee, critique assumptions made and offer potential model improvements.