In order to calculate the cash available for debt repayment, we will need to find cash flow before financing items (CFO + CFI), and then deduct any mandatory amortization (mandatory debt repayments). We also need to account for any cash we have on the balance sheet and our minimum cash balance. Cash...

The sponsor who sourced the deal and performed the initial due diligence is sometimes rewarded with a liquidation preference and a preferred return. This guarantees that, upon the sale of the company, the sponsor will receive their initial investment back before other co-investors receive any procee...

PIK interest is a non-cash interest expense, and PIK stands for payment-in-kind. Instead of deducting cash, we simply increase the debt by the amount of the interest expense. It’s like a credit card balance with a growing debt balance when interest expense is not paid. Typically, we see PIK intere...

The rule of 72 allows you to approximate how many years it takes to double your equity investment at a given IRR. Alternatively, the rule of 72 allows you to approximate the IRR required to double your equity investment. The formula is as follows: Number of years to double = 72% ÷ IRR OR IRR [&hell...

An exit equity of $60 vs. an entry equity of $20 is a 3x multiple of capital ($60 / $20). Over 5 years, a 3x multiple of capital is a 25% IRR. Dividends are assumed to be reinvested at the IRR. Reinvesting $1 in year 1 at 25% IRR for 2 years would get us […]...

In an LBO or M&A deal, the acquiror is often allowed to write up the PP&E and / or intangible assets to fair market value. Fair market value represents what the assets would be worth if they were sold in the open market, and this value is often greater than the book value of the […]...

To do an LBO model, we need to figure out the cash flows available for debt repayment. The amount of debt we can repay affects the ending debt balance, which impacts how much of the proceeds we get to keep when we sell the company. To get to the cash flow available for debt repayment, […]...

Maintenance covenants require the borrower to maintain a certain ratio or metric at all times. This is required by lenders because they want to make sure the company is in good shape to pay interest and pay back the principal. Common maintenance covenants include: Incurrence covenants are restrictio...

A positive covenant is when the company agrees to take certain actions for the duration of the loan. This can could include maintaining adequate insurance plans, performing plant and equipment repairs and upgrades, disclosing audit reports, or achieving a certain threshold in key financial ratios. A...

A revolving credit facility is like a credit card or line of credit. It can be drawn anytime as long as the maximum limit is not reached. It’s commonly used to cover cash shortfalls, net working capital needs, and acquisitions. For example, if the maximum limit is $100M and if the company is short...