Sources & Uses - Cash Free / Debt Free LBO (picture included) (2024)

3y

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I'll try and tackle this, although there will be some assumptions being made on my end so I apologize if I mess something up.

1. Enterprise to Equity Value walk. EV = Equity Value + Debt - Cash (aka+ Net Debt). However, we only care about debt on a cash free basis if we assume the equity shareholder's will be keeping the cash as cash is effectively 0. On a debt free basis enterprise value = transaction value. If we are assuming the debt rolls forward than transaction value = equity value.So rearranging if we assume the equity shareholder's keep the cash (cash free) theequity value should be Equity = EV - Debt orequal to 120 - 50= 70. If they didn't it would the normal walk of Equity = EV - Net Debt. Most importantly remember that CF / DF or not enterprise value remains the same.

2. For CF / DF your sources and uses are correct (assuming the new $80 in debt is the new buyers debt). Depending on how the transaction is set up you may further want to break out the purchase price into debt and equity just to convey what is happening with the transaction. I.e. show that the B/S had debt on it before.

3. On the second this will look like a normal transaction. Use cash from the balance sheet to fund the transaction, show pay downdebt on the uses of $50, and then show the equity value as $95 instead of $145. Remember net debt is positive here (debt > cash) the only time we see equity > enterprise value is when net debt is negative (like after a VC round when post money > pre money due to the excess cash on the balance sheet).

Hopefully that helps

3y

Yes looks correct. Someone please feel free tocorrect me as well lol.

One comment,someone might ask: well transaction values are different now aren't transaction fees a % of transaction size etc. For your purposes I would just hold steady. The EA in real life might vary though.

On the other question, I've actually seen both ways which is, as you know, generalizations with transactions aren't fun lol.

From the technically correct / interview correct I would say that the best assumption to be made is that, yes, the seller always pays themselves a dividend on a CF / DF transaction before the sale.

3y

Yea I believe you are exactly right.

What this question really is is just the big kid version of what happens to enterprise value if you find $100 on the sidewalk and put it in your back account lol. Good luck.

3y

hi, thank you for sharing this, am going through the example here but would like to clarify the non-CFDF S&U. Given non-CFDF means that buyer gets to assume existing debt and keep cash (but they'd still have to pay for cash - all sellerwould want to be compensated for cash) i would have thought that the S&U for non-CFDF to be:

Uses

Purchase equity = 95

Assume existing debt = 50

Transaction fees = 2

Fund min cash = 5

Total uses = 152

Sources

Assume existing debt = 50

Cash on BS (which seller paid for in purchase equity) = 25

New debt = 50

Sponsor equity = 27

Total sources = 152

The way i'm thinking about it is that non-CFDF means that the seller can assume existing debt hence reducing equity contribution - not sure what i'm missing here?really appreciate any clarification, thank you!

3y

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