Valuation modelling
- Management have provided you with some information regarding the business (see the tables below). They have told you who the competing bidders are, and you have pulled some valuation statistics for those bidders.
- What are you going to put in the first few boxes for your deal structure (the yellow cells below)?
- Notice from the balance sheet towards the bottom of the page that the business has no existing debt (that should help you fill in one box straight away!) and is carrying 4.0 cash. Of this, management have told you that they would want the business to retain 1.5 to help fund a store roll out programme (that should help you fill in another box straight away!), leaving 2.5 that could be paid out to the vendor as surplus cash.
- Based on the valuation statistics in the bottom table, what price might it make sense to pay for the business?
- What is the target’s enterprise value?
- What price might it make sense to pay for the equity? Remember equity = enterprise value minus debt plus surplus cash.
- Fill in the first few yellow boxes in the deal structure below. You can download the Excel spreadsheet here: valuation modelling.
Modelling LBO valuation
Here is some information regarding the LBO modelling case business:
- Retail.
- Expanding quickly.
- Has an ongoing programme of store openings.
- Good cash flow from operations but margins not particularly high.
- Very motivated management team who would like to stay with the business and gain a significant equity stake as part of this deal.
- Profit & loss summary:
| Turnover = | 20.0 |
| EBITDA = earnings before interest, tax, depreciation & amortisation | 2.0 |
| NPAT = net profit after tax | 1.0 |
- Balance sheet summary:
| Fixed assets (mainly fixtures & fittings) = | 4.0 |
| Stock (short term, perishable) = | 2.0 |
| Debtors (sales to contract customers) = | 1.0 |
| Cash = | 4.0 |
| Creditors (trade & tax) = | (8.0) |
| Net Assets = | 3.0 |
Valuation information
| Comparable companies | Enterprise Value | EV/
EBITDA |
| Sensible Co. | 100.0 | 7.0 |
| Minnow Co. | 20.0 | 8.0 |
| Mega Co. | 400.0 | 8.0 |
| FGS-LTH (= Fast Growing Sprat, Levered to the Hilt) Co | 15.0 | 12.0 |
| Struggling Co | 80.0 | 6.0 |
There’s some help available here on using EBITDA multiples in valuation, but the idea is to take an average EBITDA multiple from the chart above and apply it to the businesses 2.0 EBITDA earnings stream to calculate enterprise value. Subtract existing debt (none in this case) and add surplus cash (2.5) to calculate equity value: what the seller of the business would expect to receive for their shares.
LBO modelling course case study
Please click here to find a model answer for this part of the course: the impact of valuation on LBO structure. Please click here to continue with this LBO course training.
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