29 May Case Study:Kcoffee LBO Model Test Instructions A private equity firm is considering the leveraged buyout of , KCoffee a privately-owned coffee co
Case Study:Kcoffee
LBO Model Test Instructions
A private equity firm is considering the leveraged buyout of , KCoffee a privately-owned coffee company. In the last twelve months (“LTM”), KCoffee generated $2bn in revenue and $150 mm in EBITDA. If acquired, the PE firm believes Kcoffee’s revenue can continue to grow 15% YoY while its EBITDA margin remains constant.
To fund this transaction, the PE firm was able to obtain 4.0x EBITDA in Term Loan B (“TLB”) financing – which will come with a seven-year maturity, 5% mandatory amortization, and priced at LIBOR + 500 with a 2% floor. Packaged alongside the TLB is a $50mm revolving credit facility (“revolver”) priced at LIBOR + 500 with an unused commitment fee of 0.25%. For the last debt instrument used, the PE firm raised 2.0x in Senior Notes that carries a seven-year maturity and an 8.5% coupon rate. The financing fees were 2% for each tranche while the total transaction fees incurred were $15 mm.
On KCoffee’s balance sheet, there is $300mm of existing debt and $50mm in cash, of which $30mm is considered excess cash. The business will be delivered to the buyer on a “cash-free, debt-free basis”, which means the seller is responsible for extinguishing the debt and keeps all the excess cash. The remaining $20mm in cash will come over in the sale, as this is cash that the parties determined is required to keep the business operating smoothly.
Assume for each year that KCoffee’s depreciation & amortization expense (“D&A”) will be 5% of revenue, capital expenditures (“Capex”) requirement will be 2% of revenue, the change in net working capital (“NWC”) will be 1% of revenue, and the tax rate will be 35%.
If the PE firm were to purchase KCoffee at 10.0x LTM EV/EBITDA on 12/31/2021 and then exit at the exact LTM multiple after a five-year time horizon, what would the implied IRR and cash-on-cash return of the investment be?
Resources:
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Outcome:
One Excel Sheet File
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| Basic LBO Model | ||||||||
| ($ in millions) | ||||||||
| Step 1. Model Assumptions | ||||||||
| Entry Valuation | Transaction Assumptions | |||||||
| LTM EBITDA | Transaction Fees | |||||||
| Entry Multiple | Financing Fees | |||||||
| Purchase Enterprise Value | Financing Fees Amortization Period | |||||||
| Cash to B/S | ||||||||
| Circularity Toggle | 1 | |||||||
| Debt Assumptions | x EBITDA | $ Amount | Rate | Floor | % Amort. | % Fee | $ Fee | |
| Revolver | ||||||||
| Term Loan B | ||||||||
| Senior Notes | ||||||||
| Total Debt | ||||||||
| Step 2. Sources & Uses Table | ||||||||
| Sources & Uses | ||||||||
| Sources | x EBITDA | $ Amount | Uses | $ Amount | ||||
| Revolver | Purchase Enterprise Value | |||||||
| Term Loan B | Cash to B/S | |||||||
| Senior Notes | Transaction Fees | |||||||
| Sponsor Equity | Financing Fees | |||||||
| Total Sources | Total Uses | |||||||
| Step 3. Free Cash Flow Projection | ||||||||
| FCF Projection | 2020A | 2021 | 2022 | 2023 | 2024 | 2025 | ||
| ($ in millions) | ||||||||
| Revenue | ||||||||
| EBITDA | ||||||||
| Less: D&A | ||||||||
| EBIT | ||||||||
| Less: Interest | ||||||||
| Less: Amortization of Financing Fees | ||||||||
| EBT | ||||||||
| Less: Taxes | ||||||||
| Net Income | ||||||||
| Plus: D&A | ||||||||
| Plus: Amortization of Financing Fees | ||||||||
| Less: Capex | ||||||||
| Less: Δ in NWC | ||||||||
| Less: Mandatory Amortization | ||||||||
| Free Cash Flow (Pre-Revolver) | ||||||||
| Revolver Drawdown / (Paydown) | ||||||||
| Free Cash Flow (Post-Revolver) | ||||||||
| Beginning Cash Balance | ||||||||
| Net Change in Cash Flow | ||||||||
| Ending Cash Balance | ||||||||
| Operating Assumptions | ||||||||
| Revenue Growth % | ||||||||
| EBITDA Margin % | ||||||||
| D&A % of Revenue | ||||||||
| Capex % of Revenue | ||||||||
| Δ in NWC % of Revenue | ||||||||
| Tax Rate % | ||||||||
| Step 4. Debt Schedule | ||||||||
| Debt Schedule | 2021 | 2022 | 2023 | 2024 | 2025 | |||
| ($ in millions) | ||||||||
| LIBOR (%) | 1.5% | 1.7% | 1.9% | 2.1% | 2.3% | |||
| Revolver | ||||||||
| Beginning Balance | ||||||||
| Revolver Drawdown / (Paydown) | ||||||||
| Ending Balance | ||||||||
| Total Revolver Capacity | ||||||||
| Beginning Available Capacity | ||||||||
| Ending Available Capacity | ||||||||
| Revolver Interest Rate | ||||||||
| Revolver Interest Expense | ||||||||
| Unused Revolver Commitment Fee | ||||||||
| Unused Commitment Fee | ||||||||
| Term Loan B | ||||||||
| Beginning Balance | ||||||||
| Less: Mandatory Amortization | ||||||||
| Ending Balance | ||||||||
| TLB Interest Rate | ||||||||
| TLB Interest Expense | ||||||||
| Senior Notes | ||||||||
| Beginning Balance | ||||||||
| Less: Mandatory Amortization | ||||||||
| Ending Balance | ||||||||
| Senior Notes Interest Rate | ||||||||
| Senior Notes Interest Expense | ||||||||
| Step 5. Returns Calculation | ||||||||
| Exit Valuation | 2020A | 2021 | 2022 | 2023 | 2024 | 2025 | ||
| ($ in millions) | ||||||||
| Exit LTM EBITDA | ||||||||
| Exit Multiple Assumption | ||||||||
| Exit Enterprise Value | ||||||||
| Less: Debt | ||||||||
| Plus: Cash | ||||||||
| Exit Equity Value | ||||||||
| Cash (Outflows) / Inflows | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | 12/31/24 | 12/31/25 | |||
| E+xit Year 2021 | ||||||||
| E+xit Year 2022 | ||||||||
| E+xit Year 2023 | ||||||||
| E+xit Year 2024 | ||||||||
| E+xit Year 2025 | ||||||||
| IRR | ||||||||
| MOIC |
Complete
| Basic LBO Model | ||||||||
| ($ in millions) | ||||||||
| Step 1. Model Assumptions | ||||||||
| Entry Valuation | Transaction Assumptions | |||||||
| LTM EBITDA | $100 | Transaction Fees | $10 | |||||
| Entry Multiple | 10.0x | Financing Fees | 2.0% | |||||
| Purchase Enterprise Value | $1,000 | Financing Fees Amortization Period | 7 Years | |||||
| Cash to B/S | $5 | |||||||
| Circularity Toggle | 1 | |||||||
| Debt Assumptions | x EBITDA | $ Amount | Rate | Floor | % Amort. | % Fee | $ Fee | |
| Revolver | 0.0x | – | L + 400 | – | – | 2.0% | – | |
| Term Loan B | 4.0x | 400 | L + 400 | 2.0% | 5.0% | 2.0% | 8 | |
| Senior Notes | 2.0x | 200 | 8.5% | – | – | 2.0% | 4 | |
| Total Debt | 6.0x | $600 | $12 | |||||
| Step 2. Sources & Uses Table | ||||||||
| Sources & Uses | ||||||||
| Sources | x EBITDA | $ Amount | Uses | $ Amount | ||||
| Revolver | 0.0x | – | Purchase Enterprise Value | $1,000 | ||||
| Term Loan B | 4.0x | 400 | Cash to B/S | 5 | ||||
| Senior Notes | 2.0x | 200 | Transaction Fees | 10 | ||||
| Sponsor Equity | 4.3x | 427 | Financing Fees | 12 | ||||
| Total Sources | $1,027 | Total Uses | $1,027 | |||||
| Step 3. Free Cash Flow Projection | ||||||||
| FCF Projection | 2020A | 2021 | 2022 | 2023 | 2024 | 2025 | ||
| ($ in millions) | ||||||||
| Revenue | $1,000 | $1,100 | $1,210 | $1,331 | $1,464 | $1,611 | ||
| EBITDA | $100 | $110 | $121 | $133 | $146 | $161 | ||
| Less: D&A | (22) | (24) | (27) | (29) | (32) | |||
| EBIT | $88 | $97 | $106 | $117 | $129 | |||
| Less: Interest | (41) | (39) | (38) | (37) | (37) | |||
| Less: Amortization of Financing Fees | (2) | (2) | (2) | (2) | (2) | |||
| EBT | $46 | $56 | $67 | $78 | $90 | |||
| Less: Taxes | (16) | (20) | (23) | (27) | (32) | |||
| Net Income | $30 | $36 | $43 | $51 | $59 | |||
| Plus: D&A | 22 | 24 | 27 | 29 | 32 | |||
| Plus: Amortization of Financing Fees | 2 | 2 | 2 | 2 | 2 | |||
| Less: Capex | (22) | (24) | (27) | (29) | (32) | |||
| Less: Δ in NWC | (11) | (12) | (13) | (15) | (16) | |||
| Less: Mandatory Amortization | (20) | (20) | (20) | (20) | (20) | |||
| Free Cash Flow (Pre-Revolver) | $0 | $6 | $12 | $18 | $24 | |||
| Revolver Drawdown / (Paydown) | – | – | – | – | – | |||
| Free Cash Flow (Post-Revolver) | $0 | $6 | $12 | $18 | $24 | |||
| Beginning Cash Balance | $5 | $5 | $11 | $23 | $41 | |||
| Net Change in Cash Flow | 0 | 6 | 12 | 18 | 24 | |||
| Ending Cash Balance | $5 | $11 | $23 | $41 | $65 | |||
| Operating Assumptions | ||||||||
| Revenue Growth % | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | ||
| EBITDA Margin % | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | ||
| D&A % of Revenue | 2.0% | 2.0% | 2.0% | 2.0% | 2.0% | |||
| Capex % of Revenue | 2.0% | 2.0% | 2.0% | 2.0% | 2.0% | |||
| Δ in NWC % of Revenue | 1.0% | 1.0% | 1.0% | 1.0% | 1.0% | |||
| Tax Rate % | 35.0% | 35.0% | 35.0% | 35.0% | 35.0% | |||
| Step 4. Debt Schedule | ||||||||
| Debt Schedule | 2021 | 2022 | 2023 | 2024 | 2025 | |||
| ($ in millions) | ||||||||
| LIBOR (%) | 1.5% | 1.7% | 1.9% | 2.1% | 2.3% | |||
| Revolver | ||||||||
| Beginning Balance | – | – | – | – | – | |||
| Revolver Drawdown / (Paydown) | – | – | – | – | – | |||
| Ending Balance | – | – | – | – | – | |||
| Total Revolver Capacity | $50 | $50 | $50 | $50 | $50 | |||
| Beginning Available Capacity | $50 | $50 | $50 | $50 | $50 | |||
| Ending Available Capacity | $50 | $50 | $50 | $50 | $50 | |||
| Revolver Interest Rate | 5.5% | 5.7% | 5.9% | 6.1% | 6.3% | |||
| Revolver Interest Expense | – | – | – | – | – | |||
| Unused Revolver Commitment Fee | 0.25% | 0.25% | 0.25% | 0.25% | 0.25% | |||
| Unused Commitment Fee | $0.1 | $0.1 | $0.1 | $0.1 | $0.1 | |||
| Term Loan B | ||||||||
| Beginning Balance | $400 | $380 | $360 | $340 | $320 | |||
| Less: Mandatory Amortization | (20) | (20) | (20) | (20) | (20) | |||
| Ending Balance | $380 | $360 | $340 | $320 | $300 | |||
| TLB Interest Rate | 6.0% | 6.0% | 6.0% | 6.1% | 6.3% | |||
| TLB Interest Expense | $23 | $22 | $21 | $20 | $20 | |||
| Senior Notes | ||||||||
| Beginning Balance | $200 | $200 | $200 | $200 | $200 | |||
| Less: Mandatory Amortization | – | – | – | – | – | |||
| Ending Balance | $200 | $200 | $200 | $200 | $200 | |||
| Senior Notes Interest Rate | 8.5% | 8.5% | 8.5% | 8.5% | 8.5% | |||
| Senior Notes Interest Expense | $17 | $17 | $17 | $17 | $17 | |||
| Step 5. Returns Calculation | ||||||||
| Exit Valuation | 2020A | 2021 | 2022 | 2023 | 2024 | 2025 | ||
| ($ in millions) | ||||||||
| Exit LTM EBITDA | $110 | $121 | $133 | $146 | $161 | |||
| Exit Multiple Assumption | 10.0x | 10.0x | 10.0x | 10.0x | 10.0x | |||
| Exit Enterprise Value | $1,100 | $1,210 | $1,331 | $1,464 | $1,611 | |||
| Less: Debt | (580) | (560) | (540) | (520) | (500) | |||
| Plus: Cash | 5 | 11 | 23 | 41 | 65 | |||
| Exit Equity Value | $525 | $661 | $814 | $985 | $1,176 | |||
| Cash (Outflows) / Inflows | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | 12/31/24 | 12/31/25 | |||
| E+xit Year 2021 | ($427) | $525 | ||||||
| E+xit Year 2022 | ($427) | $661 | ||||||
| E+xit Year 2023 | ($427) | $814 | ||||||
| E+xit Year 2024 | ($427) | $985 | ||||||
| E+xit Year 2025 | ($427) | $1,176 | ||||||
| IRR | 23.1% | 24.4% | 24.0% | 23.2% | 22.4% | |||
| MOIC | 1.2x | 1.5x | 1.9x | 2.3x | 2.8x |
