Question 26 26. You have built a simple LBO model based on the acquisition of a private, family-held company in Germany for 10x EBITDA with a sale for 10x EBITDA in Year 5. The deal uses Senior Bank Debt for 3x EBITDA, 1x EBITDA worth of Seller's Notes, and a 1x EBITDA Shareholder Loan (like Preferred Stock but with tax-deductible PIK Interest). Currently, your firm expects to earn an 18% IRR over 5 years on this deal, but it would like to earn at least a 20% IRR. Based on the model excerpt below, what is the MOST VIABLE way to boost the IRR into this range? Debt Repayment: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 (+) Beginning Cash: 2 2 2 2 2 (-) Min Cash: (2) (2) (2) (2) (2) (+) Free Cash Flow: 23 27 31 35 40 (-) Mandatory Repayments: (14) (20) (27) (34) (19) CF Avail. For Debt Repayment: 9 6 4 2 21 CF Used for Debt Repayment: (9) (6) (4) (2) - Ending Cash: 2 2 2 2 2 23 Debt Balances: Senior Bank Debt: 135 112 86 55 19 - Seller's Notes: 45 49 52 57 61 66 Shareholder Loan: 45 50 56 63 71 79 Exit Enterprise Value: - - - - - 716 (-) Senior Bank Debt: - - - - - - (-) Seller's Notes: - - - - - (75) (+) Cash: - - - - - 23 Exit Equity Value: - - - - - 664 Mgmt Equity: (28) - - - - 66 Earnout Paid to Mgmt: - - - - - 15 Proceeds to Mgmt: (28) - - - - 82 Proceeds to Sponsor: (253) - - - - 582 Sponsor Multiple: 2.3 x Sponsor IRR: 18% a. Increase the Debt used to fund the deal, as the company can clearly afford more than 3x EBITDA of Senior Bank Debt. b. Remove the Seller's Note and Shareholder Loan and assume 5x Debt / EBITDA for the Senior Bank Debt, as the lower interest rates will improve cash flows. c. Negotiate for lower mandatory repayments on the Senior Bank Debt in exchange for a higher interest rate, which should also improve cash flows. d. Assume that the exit multiple is higher than 10x because of the company's FCF growth and improved FCF conversion over this period.
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- The acquisition price is 10x EBITDA. - The financing structure includes: - 3x EBITDA in Senior Bank Debt - 1x EBITDA in Seller's Notes - 1x EBITDA in Shareholder Loan - The exit multiple is also 10x EBITDA. - The current IRR is 18%, and the target IRR is Show more…
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