Developing the LBO modelling structure: debt capacity
The next stage is to flesh out the LBO modelling structure by considering the buyout’s debt capacity, and calculating the “equity gap”. Making some of your own judgements:
- How much might it be reasonable for management to put into the deal?
- What might total fees be? Have you built in enough to cover the main categories (arrangement fees for bank & private equity, your firm’s M&A advisory fee, due diligence, legal, tax structuring)?
In sources of funds you should have 4.0 cash on the balance sheet, of which the business is going to retain 1.5m (for the store roll out in uses of funds) and pay out the 2.5 surplus to the vendor (included in “price paid for shares” in uses of funds).
- Fill in the relevant boxes in the deal structure.
One of the main gaps now is debt capacity. Here are some guidelines to help you:
- As a first pass, we are going to think about debt capacity in terms of an EBITDA multiple (i.e. banks might be willing to lend a multiple of EBITDA).
- We think banks will be prepared to lend at an EBITDA multiple of 5x.
- In the current market, you think it is going to be impossible to obtain any mezzanine finance for this particular deal.
Complete the remaining boxes in the deal structure:
- What is the equity gap?
- How much do you need from private equity?
- Fill in the boxes in your deal structure (remember total sources needs to equal total uses).
If you want some space to complete your workings, you can download a spreadsheet for this section of the LBO course: modelling debt.
Continue with the LBO modelling course case study
Please click here to find a model answer for this part of the course: the impact of debt on LBO structure. Please click here to continue with the LBO course training.
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