Preferred Equity Model Review

January 12, 2023
by a searcher from Western Illinois University in St. Louis, MO, USA
Would love a fresh set of eyes to look at a preferred equity model I'm working on.
Fairly basic and the numbers are all made up.
If anyone else is considering the same kind of model, we could team up to make the model crisp.
Purpose: Analyze/Pitch opportunities using the preferred equity model. I'd be looking to self-fund advisor/deal fees and a portion of the equity required, but would also seek outside capital in exchange for preferred returns & common equity.
https://docs.google.com/spreadsheets/d/1uukKW_EkB-8mUDr81ZTdS6okrOs1-MCG/edit?usp=sharing&ouid=100875197417244069089&rtpof=true&sd=true
from Rice University in Houston, TX, USA
Preferred payments might be deferrable until a liquidity event. Just an FYI, senior lenders could restrict other payments (IE payments to seller and investors) for the first 1-3 years. May want to consider adding in something above "remaining*" for minimum cash balance (sometimes calculated as a % of revenue) so you're never running a zero-cash balance. Anything above that minimum would be cash available for optional payments.
It might make sense to try to work something out where you're not paying the seller note until the senior is paid off, and not paying the preferred until the the seller note is paid off (or in the event of an exit). I've seen this in another model and thinking if you're signing a PG, this could help de-risk it for you (and the lender).
If anyone sees something here that doesn't jive, please feel free to let me know! Thanks!
from The University of Chicago in Chicago, IL, USA
I had a quick look at the preferred model. Few comments which I will re-examine later.
1) Lenders typically have restrictions on dividends. Hence, excess cash flow is typically used to pay down senior debt,
2) Why there is preferred payment after returning investor capital?
3) Row 36 is "cumulative" Remaining. Should it be "incremental"? In Y-10, Net Income is $488 k and distribution is $981 k, I am trying to understand where extra cash comes from. (I only had a quick look; maybe I am overlooking something.)
6) Working Capital?
7) If this is an Asset purchase you could get goodwill amortization.