Steps in LBO Modelling

1/ Calculation of Purchase Price

2/ Determine Debt & Equity Funding
3/ Project Cash Flows
4/ Calculation of Exit Sale Value or Enterprise Value
5/ Work to Exit Owner Value (or Equity Value)
6/ Assess Investors return (IRR, MOIC)

1/ Calculation of Purchase Price

Target Company's EBITDA by EBITDA / EV mutiple
Target Company's EBITDA can be obtained from Income State
Mutiple by estimated based on comparables estimates

2/ Determine Debt & Equity Funding

Purchase Price to be funded from different sources of Capital
Uses of Funds including Transaction Fees : Purchase Price Plu

Types of Debt
Term Loan
Revolving credit factility
Bonds
Mezzanine Finance

What can not be funded with debt, balance must come from
3/
Free cash flow calculation (Projection for 5 years)

EBITDA -Interest exp-Income Tax-Changes in WC-Capital exp =

4/
Calculate Exit Sale Value (or ‘Enterprise Value’)
Determine the sale price by multiplying an EV/EBITDA multiple by
Note that the Exit EV/EBITDA multiple is typically assumed to

5/
Work to Exit Owner Value (or ‘Equity Value’)
Subtract the cumulative Cash Flows (Step 3 above) from the Debt
This will give you the Debt that needs to be repaid when the C
Value is then calculated by subtracting the Debt repaid at Exi
This is the money returned to the Investors in the deal.

6/
Assess Investor Returns (IRR or MOIC)
Use the Exit Equity Value and the initial Sponsor Equity to calculat
What are sources and uses?
What Does Sources and Uses Mean?
A sources and uses analysis provides a summary of where the
what this capital will purchase (the uses).
The sources and the uses must equal each other, and they mu

Example of a Sources and Uses of Cash Schedule

Here is an example of a sources and uses schedule.

The table illustrates the sources and uses of cash in a transacti
The two sides must equal each other. This is commonly perfo
 ise Value

V mutiple
d from Income Statements
es estimates

t sources of Capital
Purchase Price Plus Transactions fees
e must come from sponsor's equity

5 years)

in WC-Capital exp =LBO Free Cash flows

/EBITDA multiple by the Target Company’s EBITDA at Exit (typically Year 5).
ypically assumed to be the same as the initial Purchase EV/EBITDA multiple.

above) from the Debt used to fund the deal (Step 2 above).
e repaid when the Company is sold. Exit Equity
e Debt repaid at Exit from the Exit Sale Value (‘Enterprise Value’).
s in the deal.

sor Equity to calculate the Internal Rate of Return and the Multiple of Invested Cap
mmary of where the capital used to fund an acquisition will come from (the s

other, and they must total the total purchase price plus transaction costs

of cash in a transaction.
s is commonly performed in the financial modeling of a deal.
24.16%
pically Year 5).
/EBITDA multiple.

Value’).

tiple of Invested Capital.

ll come from (the sources),

ransaction costs
Basic LBO Model

Entry Multiple 5
Exit Multiple 5.5
Total Capital Required 800
Leverage 70%
Balance Equity 30%
Model Assumptions
EBITDA 40%
Revenue Growth 15%
Tax Rate 25%
Capex (Capital Expenditure) 10%
Interest 5%
Initial Debt 560
Equity Initial 240
EBITDA exit value 5.5X 1770
Add residual value after debt 2.0901
Exit Value 1772.1

IRR /CAGR 49.16%

MOIC 7.38XEnd value / Initial Va
 x EBITDA Revenue
X EBITDA EBITDA

Less Depreciation
Interest
Tax
of Revenue Net income
Per Year Add Depreciation
Capex
of Revenue FCFF

Debt Initial
Total Capital-Less Debt debt Repayment
Exit Mutiple * year 5 EBITDA Debt final
Residual Post debt payment
=D20+D21

nd value / Initial Value

Year
0 1 2 3 4 5
400 460 529 608.35 699.6 804.54
160 184 211.6 243.34 279.84 321.82

-10 -10 -10 -10 -10

-28 -24.325 -19.822 -14.357 -7.7744
-36.5 -44.319 -53.379 -63.871 -76.011
109.5 132.96 160.14 191.61 228.03
10 10 10 10 10
-46 -52.9 -60.835 -69.96 -80.454
73.5 90.056 109.3 131.65 157.58

560 486.5 396.44 287.14 155.49

73.5 90.056 109.3 131.65 155.49
560 486.5 396.44 287.14 155.49 0
Assumptions
From LTM Exit Multiple
Company's Revenue 500 Entry multiple
EBITDA margin 20% Enterprise Value
EBITDA 100
Bank Debt
D&A 20 Bond Funding
Initial Equity
Transaction Charge
Financing Charges

Sources and Uses

Sources Uses
Bank Debt 4x 400 Equity Purchase Pr
Bond Debt 2x 200
Initial Equity 400
1000 Total Uses

Cash flow Projection

For 5 years 0 1 2
EBITDA 100 110 121
growth 10% 10%
Less D&A -20 -25 -30
EBIT 80 85 91
Less Interest
Bank Interest -20 -20
Bond Intereste -20 -20
EBT 45 51
NET INCOME POST TAX 27 30.6
Add back D& A 25 30
Less CAPEX -25 -30
Less Chanages in NWC -10 -10

Levered Free Cash Flow 17 20.6

Terminal EBITDA 161.051

Exit multiple 1610.51

Total Debt 600

Total of FCF 127.9366
Debt outstanding 472.0634

Equity at Exit 1138.447

MOIC 2.846117
IRR 23.268%
xit Multiple 10x
ntry multiple 10x Revenue Growth
nterprise Value 1000 EBITDA Margin

ank Debt 4x 400 D& A Increase

ond Funding 2x 200 BANK INT 5%
nitial Equity 400 Bond 10%
ransaction Charges 0
nancing Charges 0 TAX RATE
Capex is the same D&A
Changes in WC

quity Purchase Price 1000

otal Uses 1000

3 4 5
133.1 146.41 161.05
10% 10% 10% Margin will be 20%
-35 -40 -45
98.1 106.41 116.05

-20 -20 -20

-20 -20 -20
58.1 66.41 76.051
34.86 39.846 45.631
35 40 45
-35 -40 -45
-10 -10 -10

24.86 29.846 35.631

 10% per year
20%

5every year
pa
pa

40%

10
Assumptions
From LTM Exit Multiple
Company's Revenue 500 Entry Multiple
EBITDA margin 20% Enterprise Value
EBITDA 100
Bank Debt
D&A 20 Bond Funding
Initial Equity
Transaction Charge
Financing Charges

Sources and Uses

Sources Uses
Bank Debt 4.00x 400 Equity Purchase Pr
Bond Debt 2.00x 200
Initial Equity 400
1000 Total Uses

Cash flow Projection

For 5 years 0 1 2
EBITDA 100 110 121
growth 10% 10%
Less D&A -20 -25 -30
EBIT 80 85 91
Less Interest
Bank Interest -20 -20
Bond Intereste -20 -20
EBT 45 51
NET INCOME POST TAX 27 30.6
Add back D& A 25 30
Less CAPEX -25 -30
Less Chanages in NWC -10 -10

Levered Free Cash Flow 17 20.6

Terminal EBITDA 161.051

Exit multiple 1610.51

Total Debt 600

Total of FCF 127.9366
Debt outstanding 472.0634

Equity at Exit 1138.447

MOIC 2.846117
IRR 23.268%
xit Multiple 10.00x x
ntry Multiple 10.00x x Revenue Growth
nterprise Value 1000 EBITDA Margin

ank Debt 4x 400 D& A Increase

ond Funding 2x 200 BANK INT 5%
nitial Equity 400 Bond 10%
ransaction Charges 0
nancing Charges 0 TAX RATE
Capex is the same D&A
Changes in WC

quity Purchase Price 1000

otal Uses 1000

 3 4 5
133.1 146.41 161.051
10% 10% 10% Margin will be 20%
-35 -40 -45
98.1 106.41 116.051

-20 -20 -20

-20 -20 -20
58.1 66.41 76.051
34.86 39.846 45.6306
35 40 45
-35 -40 -45
-10 -10 -10

24.86 29.846 35.6306

Entry Multiple
23.268% 7 8 9
7 46% 27% 17%
8 52% 32% 22%
Exit 9 58% 37% 27%
Multipl 10 63% 42% 31%
e 11 67% 45% 34%
12 71% 49% 37%
13 75% 52% 40%
 Entry Multiple
2.85 7 8 9
7 6.55 3.28 2.18
8 8.16 4.08 2.72
Exit 9 9.77 4.89 3.26
Multipl 10 11.38 5.69 3.79
e 11 12.99 6.50 4.33
12 14.61 7.30 4.87
13 16.22 8.11 5.41

Debt Multiple
23.268% 100 200 300
100 32.17% 30.23% 28.17%
150 31.09% 29.08% 26.94%
200 29.97% 27.89% 25.66%
250 28.81% 26.65% 24.33%
300 27.61% 25.36% 22.94%
350 26.36% 24.02% 21.48%
 10% per year
20%

5every year

40%
e same D&A
10
be 20%

Entry Multiple
10 11 12 13
10% 6% 2% -1%
15% 10% 6% 3%
20% 14% 10% 7%
23.27% 18% 14% 10%
27% 21% 17% 13%
30% 24% 19% 16%
32% 27% 22% 18%
Entry Multiple
10 11 12 13
1.64 1.31 1.09 0.94
2.04 1.63 1.36 1.17
2.44 1.95 1.63 1.40
2.846 2.28 1.90 1.63
3.25 2.60 2.17 1.86
3.65 2.92 2.43 2.09
4.05 3.24 2.70 2.32

400 500 600

25.96% 23.59% 21.02%
24.64% 22.17% 19.47%
23.27% 20.67% 17.83%
21.83% 19.10% 16.09%
20.31% 17.44% 14.24%
18.72% 15.68% 12.27%
Assumptions
From LTM Exit Multiple
Company's Revenue 500 Entry Multiple
EBITDA margin 20% Enterprise Value
EBITDA 100
Bank Debt
D&A 20 Bond Funding
Initial Equity
Transaction Charge
Financing Charges

Sources and Uses

Sources Uses
Bank Debt 4.00x 400 Equity Purchase Pr
Bond Debt 2.00x 200
Initial Equity 400
1000 Total Uses

Cash flow Projection

For 5 years 0 1 2
EBITDA 100 110 121
growth 10% 10%
Less D&A -20 -25 -30
EBIT 80 85 91
Less Interest
Bank Interest -20 -20
Bond Intereste -20 -20
EBT 45 51
NET INCOME POST TAX 27 30.6
Add back D& A 25 30
Less CAPEX -25 -30
Less Chanages in NWC -10 -10

Levered Free Cash Flow 17 20.6

Terminal EBITDA 161.051

Exit multiple 1956.474

Total Debt 600

Total of FCF 127.9366
Debt outstanding 472.0634

Equity at Exit 1484.411

MOIC 3.711027
IRR 29.987%
xit Multiple 12.15x x
ntry Multiple 10.00x x Revenue Growth
nterprise Value 1000 EBITDA Margin

ank Debt 4x 400 D& A Increase

ond Funding 2x 200 BANK INT 5%
nitial Equity 400 Bond 10%
ransaction Charges 0
nancing Charges 0 TAX RATE
Capex is the same D&A
Changes in WC

quity Purchase Price 1000

otal Uses 1000

 3 4 5
133.1 146.41 161.051
10% 10% 10% Margin will be 20%
-35 -40 -45
98.1 106.41 116.051

-20 -20 -20

-20 -20 -20
58.1 66.41 76.051
34.86 39.846 45.6306
35 40 45
-35 -40 -45
-10 -10 -10

24.86 29.846 35.6306

Using Goal Seek Target IRR
 10% per year
20%

5every year

40%
e same D&A
10
be 20%
Paper LBO Model
($ in millions)

Step 1. Input Transaction and Operational Assumptions

Entry Valuation Operational Assumptions

LTM EBITDA $20 LTM Revenue
Entry Multiple 10.0x Annual Revenue Growth
Purchase Enterprise Value $200 EBITDA Margin %
D&A % of Revenue
Capex (Enter as "-")
Δ in NWC
Leverage Multiple
Interest Rate
Tax Rate

Step 2. Build "Sources & Uses" Table

Sources & Uses

Sources Uses
Debt Financing $100 Equity Purchase Price
Sponsor Equity 100
Total Sources $200 Total Uses

Step 3. Project Financials

JoeCo Financials Year 1 Year 2 Year 3

($ in millions)

Revenue $110 $120 $130

EBITDA 22 24 26
Less: D&A (11) (12) (13)
EBIT $11 $12 $13
Less: Interest (5) (5) (5)
EBT $6 $7 $8
Less: Taxes (2) (3) (3)
Net Income $4 $4 $5

Step 4. Calculate Free Cash Flow

Free Cash Flow Year 1 Year 2 Year 3

Net Income $4 $4 $5
Plus: D&A 11 12 13
Less: Capex (5) (5) (5)
Less: Δ in NWC 0 0 0
Free Cash Flow $10 $11 $13

Step 5. Returns Analysis

Exit Valuation Return Metrics

Year 5 EBITDA $30 Cash-on-Cash Returns
Exit Multiple 10.0x Internal Rate of Return (IRR)
Exit Enterprise Value $300
IRR
Initial Debt Amount $100
Less: Cumulative FCF (64)
Final Year Net Debt $36

Exit Equity Value $264

 Assumptions

tional Assumptions
$100
l Revenue Growth $10
A Margin % 20%
% of Revenue 10%
(Enter as "-") ($5)
$0
ge Multiple 5.0x
5%
40%

able

Purchase Price $200

$200

Year 4 Year 5

$140 $150
28 30
(14) (15)
$14 $15
(5) (5)
$9 $10
 (4) (4)
$5 $6

Year 4 Year 5
$5 $6
14 15
(5) (5)
0 0
$14 $16

n-Cash Returns 2.6x =+D60/D23

al Rate of Return (IRR) 21.4% =+H52^(1/5)-1

21.43% =(D60/D23)^(1/5)-1
Case Study
Valen Capital is considering a leveraged buyout of Ravello Refi
and industrial chemicals.
The company is planning to increase its CapEx significantly ov
support higher growth, even if its margins fall.

Valen plans to purchase the company for 10x LTM EBITDA, an

EBITDA and Senior Notes for 2x EBITDA, with Investor Equity
The Term Loan interest rate is 5%, and 2% of the initial princip

Additionally, 100% of the company’s Free Cash Flow will be u

of the Term Loan.
The Senior Note interest rate is 10%, and no principal repaym

Ravello’s LTM EBITDA is $250 million, and it spends 60% o

SG&A. D&A is not included in these COGS and SG&A figures a

The company expects to grow its Revenue at 5.0%, 7.5%, 10.0

next 5 years, and SG&A as a % of Revenue will increase by 1%

Ravello also plans to spend 8% of its Revenue on Capital Expe

Purchases of Intangible Assets. The Change in Working Capita
Revenue per year.

The company expects Depreciation & Amortization to represe

its effective tax rate is 20%.

Valen Capital expects that it will be able to sell Ravello for 12x
holding period because of the higher growth rate.
If Valen Capital is targeting a 20% IRR over 5 years, would you
the money-on-money multiple and IRR and show the FCF and
support your answer.
uyout of Ravello Refineries, a leading producer of oil

pEx significantly over the next several years to

10x LTM EBITDA, and it will use a Term Loan for 4x

ith Investor Equity funding the remainder.
of the initial principal must be repaid each year.

Cash Flow will be used to make optional repayments

no principal repayments are allowed.

and it spends 60% of its Revenue on COGS and 15% on

and SG&A figures and is a separate expense.

at 5.0%, 7.5%, 10.0%, 10.0%, and 10.0% over the

will increase by 1% per year.

nue on Capital Expenditures (CapEx) and 4% on the

e in Working Capital will be a source of funds at 2% of

ortization to represent 5% of its annual Revenue, and

o sell Ravello for 12x EBITDA at the end of the 5-year
th rate.
5 years, would you recommend this deal? Estimate
d show the FCF and Debt paydown calculations to
Paper LBO Model
($ in Millions)

Assumptions:

EBITDA Purchase Multiple: 10.0 x EBITDA Exit Multiple: 12.0 x

Purchase Enterprise Value: $ 2,500 LTM Revenue: $ 1,000

Term Loan Leverage Ratio: 4.0 x D&A % Revenue: 5.0%

Senior Notes Leverage Ratio: 2.0 x CapEx % Revenue: 8.0%
Intangible Purchases % Revenue: 4.0%
Term Loan Dollar Amount: 1,000
Senior Notes Dollar Amount: 500 Change in WC % Revenue: 2.0%
Equity Contribution: 1,000
Tax Rate: 20.0%
Term Loan Interest Rate: 5.0%
Senior Notes Interest Rate: 10.0%
Income Statement: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Revenue: $ 1,000 $ 1,050 $ 1,129 $ 1,242 $ 1,366 $ 1,502
Growth Rate: 5.0% 7.5% 10.0% 10.0% 10.0%

EBITDA: 250 252 260 273 287 300

Margin: 25.0% 24.0% 23.0% 22.0% 21.0% 20.0%

Cash Flow Projections: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

EBITDA: 252 260 273 287 300

(-) Depreciation & Amortization: (53) (56) (62) (68) (75)
(-) Interest: (100) (99) (97) (96) (94)
Taxable Income: 100 105 114 123 131

Taxes: 20 21 23 25 26

EBITDA: 252 260 273 287 300

(-) Interest: (100) (99) (97) (96) (94)
(-) Taxes: (20) (21) (23) (25) (26)
(-) CapEx: (84) (90) (99) (109) (120)
(-) Intangible Purchases: (42) (45) (50) (55) (60)
(+/-) Change in WC: 21 23 25 27 30
Free Cash Flow (FCF): 27 27 29 30 30

Term Loan Balance: 1,000 973 946 917 887 857

Senior Notes Balance: 500 500 500 500 500 500

Returns Attribution Analysis: Exit Calculations:

EBITDA Growth: $ 505 40.4% Exit Enterprise Value: $ 3,606 Final Year EBIT
Multiple Expansion: 601 48.1% (-) Debt: (1,357) Total Debts outs
Debt Paydown: 143 11.4% Exit Equity Value: $ 2,248
Returns to Equity: $ 1,248 100.0%

Money-on-Money (MoM) Multiple: 2.2 x

Internal Rate of Return (IRR): 17.6%
Ability-to-Pay Analysis
($ in millions)

LBO Assum
LTM Entry EBITDA
Entry Leverage Multiple
Initial Debt Raised

Exit Multiple
(×) LTM Exit EBITDA
Enterprise Value @ Exit
(–) Net Debt
(–) Transaction Expenses
Common Equity Value @ Exit

Minimum Deal IRR 20.0%

Multiple of Money (MoM) 2.5x
Sponsor Equity Contribution
(+) Initial Debt Raised
(–) Transaction Expenses
(–) Financing Fees
Enterprise Value @ Purchase
Implied Maximum Purchase Multiple
Minimum Deal IRR 25.0%
Multiple of Money (MoM) 3.1x
Sponsor Equity Contribution
(+) Initial Debt Raised
(–) Transaction Expenses
(–) Financing Fees
Enterprise Value @ Purchase
Implied Maximum Purchase Multiple
LBO Assumptions
$25 LBO Holding Period
6.0x Transaction Fees (% TEV)
$150 Financing Fees (% TEV)

Assuming Exit in Year 5

9.0x 9.5x 10.0x
$25 $25 $25
$225 $238 $250
(125) (125) (125)
(6) (6) (6)
$94 $107 $119

Exit Multiple
9.0x 9.5x 10.0x

$38 $43 $48

150 150 150
(6) (6) (6)
(5) (5) (5)
$178 $182 $186
7.1x 7.3x 7.5x
 Exit Multiple
9.0x 9.5x 10.0x

$31 $35 $39

150 150 150
(6) (6) (6)
(5) (5) (5)
$171 $174 $178
6.8x 7.0x 7.1x
 5 Years
2.5%
2.0%

Year 5
10.5x 11.0x
$25 $25
$263 $275
(125) (125)
(7) (7)
$131 $143

10.5x 11.0x Note :MoM=(1+IRR)^n

2.49
$53 $58
150 150
(7) (7)
(5) (6)
$191 $195
7.6x 7.8x
10.5x 11.0x

$43 $47
150 150
(7) (7)
(5) (6)
$181 $185
7.2x 7.4x
Basic LBO Model
($ in millions)
Step 1. Model Assumptions

Entry Valuation Transaction Assumptions

LTM EBITDA $100 Transaction Fees
Entry Multiple 10.0x Financing Fees
Purchase Enterprise Value $1,000 Financing Fees Amortization Period
Cash to B/S

Circularity Toggle

Debt Assumptions x EBITDA $ Amount Rate Floor % Amort.

Revolver 0.0x - L + 400 - -
Term Loan B 4.0x 400 L + 400 2.0% 5.0%
Senior Notes 2.0x 200 8.5% - -
Total Debt 6.0x $600

Step 2. Sources & Uses Table

Sources & Uses

Sources x EBITDA $ Amount Uses
Revolver 0.0x - Purchase Enterprise Value
Term Loan B 4.0x 400 Cash to B/S
Senior Notes 2.0x 200 Transaction Fees
Sponsor Equity 4.3x 427 Financing Fees
Total Sources $1,027 Total Uses

Step 3. Free Cash Flow Projection

FCF Projection 2020A 2021E 2022E 2023E

($ in millions)

Revenue $1,000 $1,100 $1,210 $1,331

EBITDA $100 $110 $121 $133

Less: D&A (22) (24) (27)
EBIT $88 $97 $106
Less: Interest Err:522 Err:522 Err:522
Less: Amortization of Financing Fees (2) (2) (2)
EBT Err:522 Err:522 Err:522
Less: Taxes Err:522 Err:522 Err:522
Net Income Err:522 Err:522 Err:522
Plus: D&A 22 24 27
Plus: Amortization of Financing Fees 2 2 2
Less: Capex (22) (24) (27)
Less: Δ in NWC (11) (12) (13)
Less: Mandatory Amortization (20) (20) (20)
Free Cash Flow (Pre-Revolver) Err:522 Err:522 Err:522
Revolver Drawdown / (Paydown) Err:522 Err:522 Err:522
Free Cash Flow (Post-Revolver) Err:522 Err:522 Err:522
Beginning Cash Balance $5 Err:522 Err:522
Net Change in Cash Flow Err:522 Err:522 Err:522
Ending Cash Balance Err:522 Err:522 Err:522

Operating Assumptions
Revenue Growth % 10.0% 10.0% 10.0% 10.0%
EBITDA Margin % 10.0% 10.0% 10.0% 10.0%
D&A % of Revenue 2.0% 2.0% 2.0%
Capex % of Revenue 2.0% 2.0% 2.0%
Δ in NWC % of Revenue 1.0% 1.0% 1.0%
Tax Rate % 35.0% 35.0% 35.0%

Step 4. Debt Schedule

Debt Schedule 2021E 2022E 2023E

($ in millions)

LIBOR (%) 1.5% 1.7% 1.9%

Revolver
Beginning Balance - Err:522 Err:522
Revolver Drawdown / (Paydown) Err:522 Err:522 Err:522
Ending Balance Err:522 Err:522 Err:522

Total Revolver Capacity $50 $50 $50

Beginning Available Capacity $50 Err:522 Err:522

Ending Available Capacity Err:522 Err:522 Err:522

Revolver Interest Rate 5.5% 5.7% 5.9%

Revolver Interest Expense Err:522 Err:522 Err:522

Unused Revolver Commitment Fee 0.25% 0.25% 0.25%

Unused Commitment Fee Err:522 Err:522 Err:522

Term Loan B
Beginning Balance $400 $380 $360
Less: Mandatory Amortization (20) (20) (20)
Ending Balance $380 $360 $340

TLB Interest Rate 6.0% 6.0% 6.0%

TLB Interest Expense $23 $22 $21

Senior Notes
Beginning Balance $200 $200 $200
Less: Mandatory Amortization - - -
Ending Balance $200 $200 $200

Senior Notes Interest Rate 8.5% 8.5% 8.5%

Senior Notes Interest Expense $17 $17 $17

Step 5. Returns Calculation

Exit Valuation 2020A 2021E 2022E 2023E
($ in millions)

Exit LTM EBITDA $110 $121 $133

Exit Multiple Assumption 10.0x 10.0x 10.0x
Exit Enterprise Value $1,100 $1,210 $1,331
Less: Debt Err:522 Err:522 Err:522
Plus: Cash Err:522 Err:522 Err:522
Exit Equity Value Err:522 Err:522 Err:522

Cash (Outflows) / Inflows Year 0 Year 1 Year 2 Year 3

12/31/20 12/31/21 12/31/22 12/31/23
Exit Year 2021 ($427) Err:522
Exit Year 2022 ($427) Err:522
Exit Year 2023 ($427) Err:522
Exit Year 2024 ($427)
Exit Year 2025 ($427)

IRR Err:504 Err:504 Err:504

MOIC Err:522 Err:522 Err:522
sumptions
$10
2.0%
Amortization Period 7 Years
$5

% Fee $ Fee
2.0% -
2.0% 8
2.0% 4
$12

$ Amount
$1,000
5
10
12
$1,027

2024E 2025E

$1,464 $1,611

$146 $161
(29) (32)
$117 $129
Err:522 Err:522
(2) (2)
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522
29 32
2 2
(29) (32)
(15) (16)
(20) (20)
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522

10.0% 10.0%
10.0% 10.0%
2.0% 2.0%
2.0% 2.0%
1.0% 1.0%
35.0% 35.0%

2024E 2025E

2.1% 2.3%

Err:522 Err:522
Err:522 Err:522
Err:522 Err:522

$50 $50

Err:522 Err:522
Err:522 Err:522

6.1% 6.3%
Err:522 Err:522

0.25% 0.25%
Err:522 Err:522

$340 $320
(20) (20)
$320 $300

6.1% 6.3%
$20 $20

$200 $200
- -
$200 $200

8.5% 8.5%
$17 $17
 2024E 2025E

$146 $161
10.0x 10.0x
$1,464 $1,611
Err:522 Err:522
Err:522 Err:522
Err:522 Err:522

Year 4 Year 5
12/31/24 12/31/25

Err:522
Err:522

Err:504 Err:504
Err:522 Err:522
Venture Capital Method Valuation (Single Period NPV)

Exit Value
Time to Exit
Discount Rate
Investment amount
No of Founder's Shares
Post Money
Pre Money
Ownership fraction of Investors
Ownership fraction of Entreprenuers
No of New Shares
Price per Share
Final Wealth of Invesetors
Final Wealth of Entreprenuers
NPV of Investors Wealth
NPV of entreprenuer's Wealth
od NPV)
Variables Base
V 25given
t 4given
r 50% given
I 3given
X 1given
POST 4.9382716PV of Exit value
PRE 1.9382716POST-Investment
F 60.75%Investment /Post Money
1-F 39.25%1-F
y 1.5477707X*(F/1-F)
p 1.9382716Invetment / No of New shares
15.187500% of Exit Value
9.812500% of Exit Value
3PV of Wealth
1.9382716PV of Wealth
w shares
Scenario Analysis
Venture Capital Method Valuation (Single Period NPV)

Exit Value
Time to Exit
Discount Rate
Investment amount
No of Exit Shares
Post Money
Pre Money
Ownership fraction of Investors
Ownership fraction of Entreprenuers
No of New Shares
Price per Share
Final Wealth of Invesetors
Final Wealth of Entreprenuers
NPV of Investors Wealth
NPV of entreprenuer's Wealth
od NPV)
Variables Base IncreaseDecrease
V 25
t 4
r 50% 60% 40%
I 3
X 1
POST 4.9382716
PRE 1.9382716
F 60.75%
1-F 39.25%
y 1.5477707
p 1.9382716
15.187500
9.812500
3
1.9382716
Scenario Summary
Current Values: Base case
Changing Cells:
$D$8 50% 50%
Result Cells:
Post Money 4.938271604938 4.938271604938
Pre Money 1.938271604938 1.938271604938
Ownership fraction of Investors 60.75% 60.75%
Ownership fraction of Entreprenu 39.25% 39.25%
No of New Shares 1.547770700637 1.547770700637
Price per Share 1.938271604938 1.938271604938
Final Wealth of Invesetors 15.187500 15.187500
Final Wealth of Entreprenuers 9.812500 9.812500
NPV of Investors Wealth 3 3
NPV of entreprenuer's Wealth 1.938271604938 1.938271604938
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in grey.
IncreaseDiscRateDecreaseDiscRate

60% 40%

3.814697265625 6.507705122865
0.814697265625 3.507705122865
78.64% 46.10%
21.36% 53.90%
3.682349415643 0.855260033246
0.814697265625 3.507705122865
19.660800 11.524800
5.339200 13.475200
3 3
0.814697265625 3.507705122865
Value Creation Via Deleveraging and Operational Improvement
Suppose the debt capacity of the target is determined to be "3.5x leverage
(A) What is the debt capacity of the target in dollars?
Debt capacity = 3.5 × $90mm = $315mm.

(B) Assuming a 30% equity contribution and 3.5x leverage, what is the max
Max. purchase price = $315mm ÷ (1−30%) = $450mm.

(C) The sponsor expects to exit its investment after 5 years at 7.0x Year 5 EB
at which point the target is expected to have net debt of $215mm. What is th
The sponsor's initial equity investment is $450mm × 30% = $135mm.
In Year 5, the enterprise value is 7.0 × $120 = $840mm.
Therefore, the Year 5 equity value is $840mm − $215mm = $625mm.
If the sponsor makes an initial equity investment of $135mm,
and the investment appreciates in value to $625mm 5 years later, it realiz
To calculate the IRR using your HP financial calculator, enter the followi
N = 5, PMT = 0, PV = -135, FV = 625. Then, hit the I%YR button to com

(D) What is the sponsor's cash-on-cash given the information above?

CoC = $625mm ÷ $135mm = 4.6x.
 Improvement
ed to be "3.5x leverage", the target's LTM EBITDA is $90mm, and the target has no existi

verage, what is the maximum purchase price a financial sponsor can pay?
70% debt = 315mn

Mulitple EBITDA (year 5)

years at 7.0x Year 5 EBITDA of $120mm, EBITDA 7 120
of $215mm. What is the sponsor's IRR? Debt
× 30% = $135mm. Year 5 Equity value
Initial equity by sponsor
15mm = $625mm. IRR
of $135mm,
m 5 years later, it realizes an IRR of 35.9%.
ulator, enter the following inputs:
e I%YR button to compute the IRR.

ormation above? MOIC

the target has no existing debt.

BITDA (year 5)
840 equity Exit value
215 Year End 5 debt balance
625
135
35.866%

4.62963