Pre LOI Deal Financial Model - Seeking Feedback
January 31, 2023
by a searcher from Pennsylvania State University in Philadelphia, PA, USA
Hi All - I've created a basic financial model to help me evaluate deals against a few capital structure scenarios (debt, private equity). I would appreciate feedback on my assumptions (ie, am I realistic about private equity payment structure?), as well as other possible scenarios that could be built into the model.
Thanks ^redacted, ^redacted, ^redacted, ^redacted, ^redacted, ^redacted, ^redacted, ^redacted, ^redacted, and ^redacted for all the feedback on the Pre-LOI model. Version #2 is up - would appreciate further feedback if you have it in you :)
Here is the updated workbook: Pre LOI Financial Model
Thanks!
from University of Pennsylvania in Denver, CO, USA
1) I see your underwriting multiple expansion (4x EBITDA at entry but 4.8x at exit) - This might very well be the case as you scale and professionalize the business, but in general it's considered aggressive to expect multiple expansion in your underwriting case
2) Your capital only sums to 95% of the asking price
2a) Your should plan to raise more money than the asking price to cover fees and expenses (legal fees, $20-30K auditor fees to conduct a Quality of Earnings report to help with your due diligence, and any other advisory fees). This amount will vary by size of the deal, but in my experience this is very, very likely to exceed $100K all-in
3) EBITDA is likely going to be pretty different from your operating cash flow - projecting your cash flow will be really important for understanding how much debt you can afford to take on
4) Under most equity investment arrangements, they will have priority for some time of return when you exit (it could be 20%, but 8% is more standard). The good news it that you don't owe them any money until there is a liquidity event (like you selling the business) so your "Investor Equity Payments" should probably be $0 until you sell
5) Just a note that your projected earnings are pre-tax, which will have a big impact on your take-home pay. It also assumes you're paying yourself a $0 salary so this is your only source of income
6) On row 14, I think this is burdened by interest expense so it's not "EBITDA" (the "I" stands for interest)
Two last comments are 1) I didn't review all the formulas in detail so the math could be off, and 2) I don't know how much detail you're getting on the business pre-LOI, but you will want to do a lot of diligence to better understand the target's sources of income and expenses. Just assuming 8% earnings growth in the absence of any data is OK as a placeholder but there is a ton of additional detail you'll want on this
from The Citadel in New York, NY, USA
1) I would add maintenance capex into the DSCR formula some lenders include that in the calc (obviously biz dependent)
2) If your DSCR is that high (*DSCR will come down once you lower your term), you can raise more debt and less equity
3) Your investor returns should largely be coming from the high amount of leverage used to fund the transaction, with some growth. 8% EBITDA growth feels rich in any industry where you can buy the biz for ~4.0x. I wouldn't model that as my base case. I would think unless you have a unique edge (or get lucky) that's difficult to achieve. Conceptually, unless the biz has a ton of operating leverage you are growing revenues well in excess of 8% yoy to achieve 8% yoy EBITDA growth.
4) Unless there is RE, you won't get a 20 year term on SBA debt. My research says your term would be based on weighted average term of a 25 yr RE loan and 10 year cash flow loan, probably bank dependent but your term will be based on the weighted average debt quantum for the RE and business
5) My understanding (I could be wrong) was that investors provided the down payment + maybe a bit more for the balance sheet, not sure you would need so much investor equity
6) Would typically try to get a better rate on the seller note, lower than what you will borrow @ from your lender (depends on the situation)
7) If your equity investors are buying pref, I dont think they can own 20% at onset as the common equity at conversion will exceed 20% (which would then require a PG from those investors)