Calculating equity returns in LBO modelling
Now we’ve got this far through the LBO modelling course, and have a rough outline of a possible deal structure, at this next stage we will:
- Think about what we could sell the business for (say when we expect to exit in 5 years’ time), think about likely returns for equity providers, and potential returns for management.
- Use that work to negotiate the equity stake for management.
- Begin to implement that ordinary share structure by estimating how much of its equity the private equity firm might need to insert as a preferred instrument (e.g. loan stock or preference shares).
The challenge at this stage of our LBO modelling is to re-present some of the key numbers from our sources and uses chart, fill in the missing yellow boxes, calculating equity in and equity out. As part of this we need to:
- Think about what enterprise value will be when we sell in 5 years’ time – (i) in the table below. For the purposes of the exercise, assume management think they can grow EBITDA from 2.0 to 4.0 on exit.
- Calculate total net proceeds to all shareholders – (ii) in the table below. To keep it simple, assume no debt paydown (e.g. on the basis that the business grows strongly and has a working capital requirement).
If you need some space to complete your workings, you can download a spreadsheet for this section of the LBO course: modelling returns.
Continue with the LBO modelling course
Please click here to find a model answer for this part of the course: modelling returns in an LBO. Please click here to continue with the LBO course training.
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