LBO model assignment:
This individual assignment asks you to take a public firm’s financials and assess whether it makes a suitable LBO target. You will build an Excel file LBO model with a simple debt and equity structure. We have provided a blank version of one Download blank version of onethat has the required sections and the target historical financials (except for stock price). The goal of the exercise is to have you build all the connected parts of the model and determine whether the assumptions below, plus your own, result in a deal that exceeds our hurdle rate. You will evaluate Big5 Sporting Goods.
Questions to answer
What is your model’s expected IRR and MOIC? Does it exceed the 25% hurdle rate?
If it does, identify a change in the model’s financial forecasts that will generate a lower than 25% hurdle. Similarly, if it does not exceed the hurdle rate, adjust one of the income statement assumptions and discuss what is required to exceed 25%.
After working through the model, what are two diligence questions you would ask to the management team? The questions should be connected to parts of your model.
Deliverable
Excel file with calculations. Label the sections of your model clearly. See empty template for a reasonable starting point.
Add a sheet “Assumptions” that list what you view as key assumptions that you made in the model
Add a sheet “Answers” that address #1, #2, and #3 above
Model assumptions (some already coded into file)
The debt financing fee is 3.5% (no need to amortize, pay at close)
Control premium of the last 6 months of the traded share price of 20-25%
The revolver should not be needed and can be ignored (we will investigate those soon)
Debt to total deal value (%) in range with the last 2 years of PE deals (see slides)
A baseline model of forecasted financials that is grounded in the company’s history and incorporates some growth or new efficiencies
Select key drivers as a % of revenues.
Capex, depreciation, and NWC (as a function of current assets and liabilities) also work in this way.
No management rollover
Debt terms: See Excel template; Assume SOFR is fixed over the investment window
5-year holding period
Exit multiple that is equal to that implied by your control premium (make this clear in your Excel)
Big5 Sporting Goods specifics
Assume the deal year is the end of fiscal year 2022 (Jan 1) and you are using the Jan 2023 numbers.
See the CF statement for historical depreciation and amortization (D&A)
Assume that 50% of D&A is depreciation
Rough grading rubric:
Entry EV and equity value clear in the Excel
Defend the control premium
Sources and uses tables incorporate all the components and fees
Build out a simple income statement –> EBITDA and NI as outputs
Build out a simple schedule that tracks total debt balance over time
Calculate leveraged CF that provides the starting point for the debt repayment
Calculate the interest payments each year using the average balance of the debt; incorporate into the Income Statement (and thus Net Income)
The income statement and balance sheet drivers are clear and explained in your “Assumptions” sheet
Output a final debt level, cash balance, and equity
Calculate the IRR and MOIC of the deal
