Cash-Free, Debt-Free Deals in LBO Models: How They Work

Published on February 23, 2022

Latest videos top searched medical Debt, Eliminate Your Credit Card Debt, Debt Problem, Credit Card Offers, and Why Cash Free Debt Free, Cash-Free, Debt-Free Deals in LBO Models: How They Work.

In this tutorial, you’ll learn what a Cash-Free Debt-Free Deal means, how it works in the context of a leveraged buyout, and how LBO models that use this deal structure differ from ones that use a standard structure.

Resources:

https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-17-Cash-Free-Debt-Free-LBOs-Slides.pdf

https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-17-Cash-Free-Debt-Free-LBOs.xlsx

Table of Contents:

0:00 Introduction

1:19 The Short Answer

5:48 Detailed Changes in the Excel Model

11:43 Additional Questions

12:52 Recap and Summary

Lesson Outline:

QUESTION: “When modeling a ‘Cash-Free, Debt-Free’ deal, and the Target has both Cash and Debt on its Balance Sheet, how do you adjust for it in a 3-statement model?

I know Cash and Debt are both supposed to go to 0, but how do you make sure the Balance Sheet still balances?

Also, how do you record this type of deal in the Sources & Uses schedule?
Do you show the Equity Value or Enterprise Value on the Uses side?

Do you have any examples to show how this type of deal works?”

SHORT ANSWER: In a Cash-Free, Debt-Free Deal, the Target’s existing Cash and Debt balances go to 0 right after the deal closes.

In the Sources & Uses schedule, the Uses side should be based on Purchase Enterprise Value + Transaction Fees; the Sources side has the standard items, such as Debt and Investor Equity.

No “adjusting offsets” are needed as long as Investor Equity acts as the plug and reflects the Cash used and Debt repaid.

The Total Uses increases by the existing Debt and decreases by the existing Cash, which means Total Sources changes as well.

By contrast, in a “standard” (Non-Cash-Free, Debt-Free) Deal, the Target’s existing Cash and Debt do not necessarily go to 0 upon deal close.

For example, maybe the Target keeps some of its Cash on its Balance
Sheet rather than using it to fund the deal.

Or, maybe the Acquirer assumes the Target’s Debt rather than repaying it and replacing it with new Debt.

The bottom line is that there are more “options” and possibilities for the treatment of Cash and Debt in a standard (non-cash-free, debt-free) deal.

Required Changes in Excel-Based LBO Models

We’ll use a simplified LBO model to illustrate the changes here because it’s easier to see the changes with a single, standalone company.

Change #1: We need different Sources & Uses schedules for both transaction scenarios because Investor Equity will change.

Change #2: We need to add some checks for the deal type to the Cash, Debt, and Equity adjustments on the Balance Sheet.

In Cash-Free, Debt-Free Deals, existing Cash and Debt always go to 0.

But in standard deals, they change based on the assumptions for Refinanced Debt and Cash Used to Finance the Deal in the S&U schedule.

Change #3: In the Debt Schedule, we need to check for the deal type and link to the proper version of the S&U schedule for each tranche of Debt (including Assumed Debt).

Our “New Debt” assumptions may change based on the deal type, so we need to check for this case.

Change #4: The IRR and Money-on-Money Multiple calculations at the end need to check for the deal type because the Investor Equity differs in each case.

Do Cash-Free Debt-Free Deals Affect Much of Anything?

In most cases, there is not a huge impact on the model.

In the example here, the IRR changes by ~1-2% in each year depending on the Cash and Debt assumptions – that is something, but not enough to affect your investment recommendation.

There would be more of a difference if the company had a massive Cash balance, but that would also affect a standard deal!

In terms of the mechanics, if the Target’s Debt exceeds its Cash, then the Target uses its entire Cash balance to repay as much Debt as it can, and the Acquirer repays the rest when it completes the deal (higher effective price).

If the Target’s Cash exceeds its Debt, then the Target repays its entire Debt balance, and then it uses the extra remaining Cash to repurchase shares or issue a “Special Dividend” to its shareholders (or something similar).

In either case, the Target’s Equity Value is lower, meaning the deal price is lower for the Acquirer.

Why Cash Free Debt Free

Why Cash Free Debt Free, Cash-Free, Debt-Free Deals in LBO Models: How They Work.

Your Fast Guide To Financial Obligation Freedom

When you look over your debt, what kind do you have? In current studies from 2008 the typical balance increased 30.5% to approximately $7350.00. Credit debt is the most pricey financial obligation you can obtain.

Cash-Free, Debt-Free Deals in LBO Models: How They Work, Play more complete videos about Why Cash Free Debt Free.

Government Grants Vs Debt Settlements – What’s The Distinction?

We discussed the advantages of a Secured Debt debt consolidation loan, now let’s see the cons. This sort of debt does not have collateral connected to it. Modification your state of mind about debt.

Debt liberty is only hard due to the fact that you do not wish to apply the abilities needed to make it possible. There are only a handful of people who can do this effortlessly. These are individuals who have the best qualities that naturally make them more mindful of their finances.

Since your aim is to arrange out your debt issue, a low rate is very essential for you. Owing money means paying high interest in every installment in addition to the capital. A Secured Debt debt consolidation loan will provide you freedom form paying high interest. At the very same time it will make your monthly payment smaller sized. So you can conserve good amount on every installation.

Do not conceal your life lessons under a rock. Assist under served segments of society in such a way that finest utilizes your understanding, abilities, and enthusiasm. No matter what you have actually experienced [excellent or bad] there is a lesson in it to be shared. Sharing permits providers to open their hearts, establish communities, and expand the general well being of society. Giving back is a part of the cycle of life. It keeps our souls debt complimentary and opens the heart and hand to eventually receive again perhaps even in another way.

So your objective is to be Debt Free in five years. How are you going to do it? The answer: By utilizing the service principle of the 21st century. Multi level marketing.

What is in your financial obligation basket? All financial obligation is not produced equal and 10% of your rating is based on your credit mix. Banks will look at how much of your debt is in Revolving Debt (charge card) and just how much is in installment financial obligation (vehicle loan etc) A Revolving Debt (credit card debt) never ever disappears thus the name revolving however installment debt e.g. vehicle loan have an end in sight. So in order to improve your FICO rating you wish to pay your credit card debt initially.

This might sound strange to you but you can’t have good credit without debt! It’s not possible. Not with the method our existing credit system is established. Your credit report is essentially a record of the loans/credit you have actually been provided. Your credit history is a number representing how well you have managed those loans. Since you enter into debt when you take credit or get loans, your credit rating is a reflection of how well you have managed debt. A high score means you are proficient at handling financial obligation (up till now that is).

Finding the very best money benefits credit cards is actually easy. Just make sure that your FICO score has actually increased sufficiently, so it makes good sense to get a 1% cash rebate, or a 5% money refund credit card. Then get the very best cash refund card online and use your finance abilities that you developed while getting out of debt, to continue playing the video game with the banks, this time the “get the maximum money back while not entering into debt” game. It is a fun and profitable video game!

Or do you know how much cash you have delegated spend this month? To help you out in this regard, secured financial obligation consolidation loans can be of fantastic assistance. So, let’s presume for a minute you have a low score.

If you are finding updated and exciting comparisons relevant with Why Cash Free Debt Free, and debt Management, Past Due Credit Card Debt, Financial Freedom you should list your email address for a valuable complementary news alert service for free.

  • Leave a Reply

Enjoyed this video?
"No Thanks. Please Close This Box!"