LBO Questions Flashcards

Question

Can you name a scenario when multiple contraction is common?

Answer 1

For large-sized companies undergoing LBOs, it's normal to see minor multiple contractions. The reason is that as the company grows larger, the number of potential bidders that could afford to purchase the company grows smaller (i.e., a reduced pool of prospective buyers with sufficient capital). Since there's less competition, this usually leads to a lower purchase price. This company could undergo an IPO, but this would depend on the situation, and a minor contraction in the exit multiple would not impair returns to the fund, especially since the expanded size of the company implies there was revenue and EBITDA growth, as well as debt paydown.

Answer 2

All else being equal, the revenue quality would be higher for the B2B company. There is a higher likelihood of long-term contracts for customers that are businesses than consumers. Most individual consumers opt for monthly payment plans. Simply put, businesses have significantly more spending power than consumers and are overall more reliable as customers. Businesses also have more loyalty to a particular company with whom they partner. The primary cause of this low churn (i.e., revenue “stickiness”) is the switching costs associated with moving to another provider and overall being less sensitive to pricing changes.

Answer 3

Is there a strong management team in place and do they intend to stay on during the LBO? What value does the company's products/services provide to their customers? Which factors make the company’s revenue recurring? Are there any long-term customer contracts? Where does the team see new opportunities for growth or operational improvements? What has been driving recent revenue growth (e.g., pricing increases, volume growth, upselling)? How is the threat of competition? Does this company have a defensible "moat" to protect its profits? What specific levers does the private equity firm have to pull for value creation? Is the industry that the company operates within cyclical? How concentrated are the company's revenue and end markets served? Is there a viable exit strategy? Will there be enough buyer interest when the firm looks to exit?

Answer 4

Is a leveraged buyout where a significant portion of the post-LBO equity comes from the previous management team. The typical premise behind an MBO is that the management team believes it can operate the company better and create more value under their direction. An MBO usually coincides with recent underperformance and scrutiny from a company's shareholder base. Management will usually provide cash equity and rollover any existing equity. In addition, equity financing can also include financial sponsors or other investors. The debt financing portion of the MBO, other than the rollover amount, is similar to that of a traditional LBO.

Answer 5

The existing management team will occasionally rollover some (or all) of its equity into the newly acquired company and may even contribute additional capital alongside the financial sponsor. The rollover equity is an additional source of funds, and it reduces the amount of leverage needed to be raised and the equity contribution from the financial sponsor to complete the deal. If a management team is willing to rollover some equity into the new entity, it implies the management team is doing so under the belief that the risk they're undertaking is worth the potential upside. It's beneficial for all parties in the deal for management to have “skin in the game” and have closely aligned incentives.

Answer 6

Term loans are a cheaper form of debt with lower interest rates, and most PE firms will first maximize the amount that banks and institutional lenders will provide before raising riskier forms of financing. Since optional repayments are typically allowed with term loans, there's greater flexibility. In addition, if the company is expecting to be active in terms of M&A activity (e.g., add-ons, divestitures), the restrictive incurrence covenants associated with subordinated notes should be considered.

Answer 7

The vast majority of traditional buyout firms would choose stability in revenue over rapid growth. Given the capital structure considerations and usage of high leverage, most buyout-focused PE firms would choose consistent, predictable revenue over high growth if the decision were mutually exclusive.

Answer 8

Asset-light industries can often be attractive because they require less capital to be deployed to generate sales growth. However, a highly capital-intensive industry could create a high barrier to entry that deters entrants, confers stability, and increases the collective pricing power over customers. Since a capital-intensive industry implies higher amounts of PP&E, this can become beneficial when raising debt financing. As a result of having more fixed assets that can be pledged as collateral, the company can receive better lending terms as the borrowing base has increased.

Answer 9

While pricing power is a lever for revenue growth, an overly expensive product decreases the number of potential buyers due to the product being out of their price range. Therefore, there must be a balance between having high pricing from product quality and being able to reach a large enough market for there to be opportunities for expansion and new customer acquisitions.

Answer 10

An add-on acquisition occurs when a private equity firm's portfolio company (platform) acquires a smaller company to complement its operations. Strategic Rationale: Synergies: The add-on enhances the platform’s product or service offerings, enabling cost savings or operational efficiencies. Market Expansion: Provides access to new end markets, extending the platform’s reach and growth potential. Inorganic Growth: Often central to the private equity firm's initial investment strategy, especially in fragmented industries. Roll-Up Strategy: Private equity firms specializing in consolidation target platform companies in fragmented markets and execute multiple add-ons to scale operations and improve competitiveness. Competitive Advantage in Auctions: Platform companies can compete with strategic buyers in sale processes by leveraging synergies from add-ons, increasing the attractiveness of their bids.

Answer 11

An exception to the customer concentration risk will be if there are irrevocable contracts in place (i.e., long- term customer agreements). This contractual obligation between the company and the customer being served makes the concentration risk more tolerable but could still lead to a discount on the purchase price.

Answer 12

Increased Pricing Power: Most customers will pay more for a stronger brand and complementary product or service offerings bundled together, leading to greater pricing power. More Bargaining Power: Larger incumbents with higher market shares have more leverage when negotiating terms with suppliers, enabling them to extend their payables (leading to a more attractive cash conversion cycle), in addition to being able to make bulk purchases at discounted rates. Lower Customer Acquisition Costs (CAC): From improved software (e.g., CRM, ERP) and more infrastructure-related integrations, CACs decrease due to increased scale and higher efficiency. Improved Cost Structure: Upon closing, the consolidated company can benefit from economies of scale and cost savings. The increased profitability could come from combined divisions or offices, removal of redundant functions, and reduced overhead expenses (e.g., marketing, accounting, IT).

Answer 13

Multiple arbitrage refers to acquiring a target company at a lower valuation multiple (e.g., EV/EBITDA) than the platform company’s multiple. This creates immediate value accretion. Mechanism: Accretive Transaction: The target’s cash flows are revalued at the platform’s higher multiple post-acquisition, boosting the combined entity’s valuation before operational improvements. Example: A platform valued at 10x EBITDA acquires a target valued at 6x EBITDA. Post-acquisition, the target’s EBITDA is valued at 10x. Rationale for Private Equity: A key driver of add-on acquisitions, enabling instant value creation purely through financial re-rating. Complements operational synergies (cost savings, revenue growth) but does not rely on them. Sustainability: Depends on maintaining the platform’s higher multiple. Market skepticism may arise if arbitrage is perceived as a short-term financial trick versus genuine value creation.

Answer 14

f the initial investment tripled in five years, the IRR would be 24.6%. Since it's doubtful that you would be handed a calculator to solve this question, the most common IRR approximations should be memorized, as shown in the table below: Common IRR Approximations 2.0x Initial Investment in 3 Years → ~25% IRR 2.0x Initial Investment in 5 Years → ~15% IRR 2.5x Initial Investment in 3 Years → ~35% IRR 2.5x Initial Investment in 5 Years → ~20% IRR 3.0x Initial Investment in 3 Years → ~45% IRR 3.0x Initial Investment in 5 Years → ~25% IRR

Answer 15

The Rule of 72 states that in order to figure out how long it would take to double an investment, divide 72 by the investment’s annual return. Here, it's suggested to take approximately 72/9 = 8 years to double. There is also a lesser-known rule, called the Rule of 115, which estimates the time to triple an investment by dividing 115 by the rate of return.

Answer 16

Since an LBO would involve the capital structure of a target being replaced, any pre-LBO debt wouldhave no direct impact on returns. Upon completing an LBO, the firm has essentially wiped out the existing capital structure and recapitalized it using the sources of funds raised. For the most part, the pre-acquisition capital structure, therefore, has no impact because it doesn't directly affect the primary return drivers. The returns to a financial sponsor are based on 1) the initial equity contribution cash outflow and 2) all cash inflows received throughout the holding period such as dividends, monitoring fees, and most notably the exit proceeds. There are a few minor considerations such as the management team being inexperienced with running a company using leverage (and the lower margin of error). This might be brought up as a risk during debt financing, but it would be a relatively insignificant detail.

Answer 17

Financial sponsors raise capital to fund their investments from insurance companies, pension funds, sovereign wealth funds, endowments, high net worth individuals, and financial institutions.

Answer 18

Committed but unallocated capital a firm has on hand. Dry powder mounting at record-high levels signifies fewer investment opportunities in the market that fit private equity firms' criteria. The purchase multiples usually increase during these times as auction processes become more competitive.

Answer 19

Proprietary Deals: Initiated through cold outreach or existing relationships between the target and the firm.PE firms typically reach out expecting the company not looking to sell currently, but they want to be the first firm called if mgt looks to sell in the future. Intermediated Deals: Intermediated auctions, in contrast, are led by an investment bank with an extensive list of potential buyers. The increased competition among buyers is are likely to lead to higher prices as the sell-side bank is trying to extract the highest sale price in an auction process.

Answer 20

Advantages: Higher Returns: Private equity targets IRRs of 20-25%, significantly higher than public equities (~10% average) Active Management: PE managers actively work with portfolio companies to create value through operational improvements and cost reductions, enhancing returns Diversification: PE investments provide exposure to private companies and sectors not available in public markets, reducing portfolio correlation with market fluctuations Access to Unique Opportunities: PE offers investments in emerging industries, high-growth startups, and niche sectors, unavailable in public markets Long-Term Focus: Longer investment horizons allow companies to prioritize growth and innovation without short-term market pressures Disadvantages: Illiquidity: PE investments are locked in for 5-10 years or longer, limiting flexibility and access to capital Higher Risk: Portfolio companies often use leverage, increasing bankruptcy risk compared to public equities Complexity & Transparency: PE investments are less transparent, with infrequent valuations and limited visibility into portfolio company operations High Fees: PE firms charge substantial management and performance fees (e.g., "2 and 20"), reducing net returns Market & Economic Sensitivity: PE performance can be affected by economic cycles, suppressed equity prices, or unfavorable exit conditions

Answer 21

The standard compensation structure prevalent in the private equity industry. Firm charges 2% of assets under management (i.e., the management fee) and then 20% of the profits earned (i.e., the “carried interest”). 2% Fee: The 2% management fee is typically meant for the firm to cover operational costs (e.g., employee salaries, administrative expenses). 20% Fee: This is the incentive fee dependent on the fund’s performance. 20% of the firm's profit beyond a pre-determined threshold goes toward the general partners (GPs) of the PE firm.

Answer 22

The allocation schedule that shows the distribution of proceeds from an investment to the various stakeholders in a systematic order based on their claims' priority. Each stakeholder would have a different claim on the pool of profits based on the security they hold. Classic PE Distribution Waterfall 1. The initial investment from the LPs will first be returned in full, along with any returns related to a fund’s pre-determined minimum hurdle rate. 2. Then, 20% of the returns will be distributed to the GPs due to the catch-up clause. 3. The remaining excess proceeds would then be split 80% to the LP and 20% to the GP. The percentages can vary, but the 80/20 split is the industry standard

Answer 23

Will be outlined in the contract with the private equity fund's LPs. It states that once the LPs have received a specified return (usually their initial investment plus a hurdle rate), the GPs receive the majority (or all) of the profits until the return proportion outlined in the agreement is met so that the GPs' return will “catch-up” to the original agreed-upon split since the LPs were paid first

Answer 24

Gives fund LPs the right to reclaim a portion of the incentive fees distributed to the GPs that were over the original agreement (i.e., GPs were overpaid in carried interest). For example, a fund can start well in terms of investment returns (i.e., the first couple of exits), which benefits both the GPs and LPs, but then later, the back-end of the remaining portfolio companies could be less profitable, and this clause gives LPs the right to reclaim some of their capital back.

Answer 25

LBOs are accounted for as an acquisition, meaning assets are written-up, and goodwill is recognized. Recapitalizations are mechanically similar but are not accounted for as an acquisition – thus, the asset bases carryover and remain unchanged with no goodwill recognized. Since no goodwill is recognized, negative equity is often created because the offer price is often higher than the book value of equity.

Answer 26

Also known as monitoring fees, is the annual fee paid by a portfolio company to its owner, the private equity firm. Many private equity firms, particularly those with in-house consultants, a team of operating partners, or have a separate division specifically offering consulting services, will arrange these types of advisory fees in their investment agreement.

Answer 27

1. Corporate tax reduced from 35% to 21% 2. Companies can roughly deduct interest up to 30% of their EBITDA 3. Companies can now accelerate depreciation for tax purposes even more than they could before, which lowers upfront tax bills. This lowers taxes further for capital intensive businesses. 4. Companies can no longer carryback NOLs but can carryforward indefinitely for 20 years and offset only 80% of current period income (before tax reform, NOLs could offset 100% of current period income).

Answer 28

When the limited partner (LP) makes a capital commitment to a private equity fund, the most common LP partnership is the blind pool fund. This is the traditional investment model found in the PE industry, and it means the LPs are not directly involved in the firm's investment decisions to any extent. Instead, the investments are made at the discretion of the GPs and the firm's investment team. Once LPs have committed capital, they don't evaluate the investments to be made by the fund. However, most LPs would not invest in a fund unless they have a personal relationship with the GPs, understand their strategy and track record, and have seen their past returns.

Answer 29

Otherwise known as a “drawdown,” is a request from the GPs to the LPs to provide the monies they have committed to the fund. Within the pre-determined duration outlined in the initial agreement, the LP must provide the committed capital (usually ~7- 12 days on average). If an investor invests in a fund, the agreement made is that the investor will provide the capital when requested by the firm – rather than the firm holding on to the capital at all times. Thus, LPs can do what they want with the committed capital to receive a low-risk return while waiting on the capital call (i.e., invest in mutual funds, liquid government bonds). However, an LP failing to provide the capital within the timeframe would result in the LP paying a penalty fee or having to pay the remaining committed capital upfront since the terms of the agreement were not abided by.

Answer 30

An LBO model analyzes the impact of a company buyout by financial sponsors using both its own equity and new borrowing as the two primary sources of capital.

Answer 31

1. Entry Valuation: The first step to building an LBO model is to calculate the implied entry valuation based on the entry multiple and LTM EBITDA of the target company. If the company is publicly traded, then the offer price per share could alternatively be used. (Uses of Funds Sources of Funds) 2. Sources & Uses Table - Purchase price for existing equity//Senior debt (Term Loan A/B) - Refinance pre-LBO debt//Subordinated debt (mezzanine) - Transaction/financing fees//Sponsor equity (20-40% of total) 3. Free Cash Flow Build: - Forecast 3-statement model (Income Statement, Balance Sheet, Cash Flow) over 5-7 years. Debt schedule tracks: - Interest expense based on floating/fixed rates. - Mandatory repayments (amortization) and optional prepayments from excess cash flow. 4. Exit Valuation & Returns: - Exit multiple (e.g., EV/EBITDA) applied to projected exit-year EBITDA to estimate exit enterprise value. Sponsor returns calculated via: - IRR: Annualized return rate. - MoM: Total proceeds ÷ initial equity investment. 5. Sensitivity Analysis: scenarios and sensitivity analysis can be added to provide users with different ways to look at the model’s output – one common sensitivity is to back into the implied pre-LBO equity value based on explicit sponsor hurdle rates and operating assumptions. (Tests impact of variables (e.g., exit multiple, EBITDA growth, debt terms) on IRR/MoM. Common outputs: IRR threshold analysis: Minimum exit multiple needed to hit sponsor’s target return (e.g., 20%+). Breakeven scenarios: EBITDA growth required under different exit multiples.)

Answer 32

From the private equity firm's perspective, the key component being quantified is the amount of equity required to be contributed. Uses Side: The “Uses” side answers, “What does the firm need to buy, and how much will it cost?” The most significant usage of funds in an LBO is the buyout of equity from the target’s existing shareholders. Other uses include transaction fees paid to M&A advisors, financing fees, and the refinancing of existing debt (i.e., replacing the debt) if applicable. Sources Side: The “Sources” side tells us, “Where is the funding coming from?” The most common sources of funds are various debt instruments, the equity contribution from the financial sponsor, excess cash on the balance sheet, and sometimes management rollover.

Answer 33

The two most common types of credit ratios used are leverage ratios and interest coverage ratios. The leverage ratio parameters will depend on the industry and the lending environment. However, the total leverage ratio (total debt/EBITDA) in an LBO ranges between 5.0x to 7.0x, with the senior debt ratio (senior debt/EBITDA) around 3.0x. For interest coverage ratio parameters, as a general rule of thumb: the higher the interest coverage ratio, the better. The interest coverage ratio should be at least 2.0x in the first year post-buyout.

Answer 34

An LBO is called a "floor valuation" because it's used to determine the maximum purchase price the PE firm can pay to achieve the fund's minimum IRR threshold. (the process of solving for the maximum purchase price that allows a private equity sponsor to achieve their hurdle rate (typically 20–25% IRR) effectively establishes a "floor valuation" for the target company.) The “hurdle rate” is the rate of return that financial sponsors are required to meet (and ideally exceed) to undertake an LBO LBO model provides a floor valuation for an investment, as it's used to determine what a financial sponsor can pay for the target while still realizing the minimum 15% to 25% IRR. This is due to the risks associated with leverage and relatively short investment horizons, as well as the return expectations from their fund’s LPs. These hurdle rates are usually higher than the cost of equity capital on the same business without those LBO-specific risks. Thus, the present value (or valuation) implied, given those higher hurdle rates, will be lower than the valuation of the company when analyzed through the traditional DCF and comps approaches.

Answer 35

The most common approach is to assume that the private equity firm will exit at the same EV/EBITDA multiple at which the target company was acquired. For example, if sponsors are contemplating an LBO where the purchase price reflects a 10.0x EV/EBITDA multiple, the exit year assumption (usually 5-7 years from the LBO date) will probably be the same 10.0x multiple. Because the exit EV/EBITDA multiple (often assumed to be the same as the entry multiple, such as 10.0x, after 5–7 years) has a major impact on the deal’s projected IRR, LBO models typically sensitize this assumption. This means they show how the IRR changes across a range of possible exit multiples, allowing sponsors to evaluate the deal’s attractiveness under different exit scenarios.

Answer 36

The two variables chosen would be the entry and exit multiple, as no other variables have the same level of impact on the returns in an LBO. The ideal scenario for a financial sponsor is to purchase the target at a lower multiple and then exit at a higher multiple, leading to profitable returns. Some other variables to include in the sensitivity tables are revenue growth, total leverage turns (the leverage multiple at purchase), and the EBITDA margin.

Answer 37

Lower capex and NWC requirements means that more free cash flow can be used to paydown debt and reinvest into operations. Cash Flow Priority: LBO investors prioritize free cash flow (FCF) to service debt and fund growth. High capex and NWC reduce FCF, limiting funds for: Debt repayment (principal + interest). Reinvestment in operations or strategic initiatives. Capex Concerns: Maintenance vs. Growth: Ideal LBO targets have low maintenance capex (essential for operations). High capex suggests: Capital-intensive industry (e.g., manufacturing, utilities). Unfavorable cost structure, reducing profitability and exit multiple potential. Net Working Capital (NWC) Impact: Increased NWC (e.g., rising inventory, accounts receivable) ties up cash, straining liquidity. Negative NWC (e.g., prepaid revenue) is preferred, as it generates cash.

Answer 38

The management rollover amount would be either a hardcoded input of the contribution amount in dollars or as a percentage of the new equity.Rollover Equity = Total Equity × Rollover Equity % The management’s ownership stake in the post-LBO company will be calculated as the rollover equity amount divided by the new equity amount, plus the rollover equity amount. New Ownership Stake = Rollover Equity Amount/(Rollover Equity Amount + New Equity) Rollover Equity Proceeds (at exit) = Exit Equity Value × Management Implied Ownership %

Answer 39

IRR is the effective compounded annual interest rate on an investment. Internal Rate of Return (IRR) = (FV/PV)^(1/t) – 1 Multiple of Money (MoM): Referred to as the cash-on-cash return or multiple on invested capital (MOIC), the MoM is the total inflows divided by the total outflows from the investor's perspective. MoM compares the amount of equity the sponsor takes out relative to the initial equity contribution. MoM =Total Cash Inflows/Total Cash Outflows

Answer 40

The IRR can be calculated using the MoM and number of years (t) using the formula below: Internal Rate of Return (IRR) = MoM^ (1/t) – 1

Answer 41

Positive IRR Levers: - Earlier extraction proceeds - Increased FCFs - Multiple Expansion (A higher exit multiple directly increases the Multiple of Money (MoM), which in turn raises the Internal Rate of Return (IRR) in leveraged buyouts (LBOs). Negative IRR Levers: - Delayed Receipt of Proceeds - Decreased FCFs - Multiple Contraction

Answer 42

Over shorter time frames, the MoM is more important than the IRR; however, over longer time frames, achieving a higher IRR is more important.

Answer 43

To determine the IRR of any investment, you need the magnitude of the cash outflows/inflows and their corresponding dates. IRR= assumes that each cell is separated by precisely twelve months, which would be unrealistic. Instead, use = XIRR (Range of CFs, Range of Timing),” in which you'll drag the selection across the range of cash inflows/outflows and then across the corresponding dates.

Answer 44

Gross IRR is the returns at the fund level before deducting any management fees and carried interest Net IRR, is the returns by a fund at the LP level, once management fees and carried interest have been subtracted.

Answer 45

Refers to the timing of return proceeds received by a fund’s LPs. The graphing of the net realized IRR of a fund gives rise to the "J" shape. Early in the fund lifespan, the J-curve begins with a steep, negative slope as the initial investments represent capital outflows and the annual management fee paid to the PE firm. But gradually, as the fund exits its portfolio companies after each holding period, the downward trajectory will reverse course and ascend upward.

Answer 46

(Fund strutures require returns of funds to LPs upon each holding period, and PE's are evealuated based on the return metric IRR, therefore shorter is better for marketability perposes) The average holding of a private equity firm is about 5 to 7 years. Traditional private equity firms, unlike pension funds that target lower IRRs of around ~8-10%, cannot hold on to portfolio companies for longer durations since they raise capital in fund structures, and therefore have to return money to their limited partners (LPs) many times before fundraising for their next fund. Besides the need to return capital to investors in the current fund, IRR is one of the LPs' primary metrics to evaluate PE firms' performance. From a firm marketability perspective, it would also be beneficial to avoid holding onto an investment for too long as doing so decreases the fund’s IRR.

Answer 47

Unless the returns realized are an anomaly, PE firms want to avoid holding onto a company for only 1 to 2 years since the capital has to be redeployed. The decision will depend on the deal environment and opportunities present in the market as finding another suitable investment could take a long time. The opportunity cost of having to find a replacement deal will have to be weighed by the firm. In addition, the transaction costs would be another side consideration.

Answer 48

1. Calculation: Levered FCF = EBITDA – Taxes – Interest – Capex – Increase in NWC − Mandatory Debt Amortization (Excludes interest, taxes, depreciation, and amortization. Focuses on core operating profit.) Purpose: Assesses cash generation efficiency relative to the initial equity outlay. Complements traditional metrics (IRR, MoM) by focusing on liquidity and downside protection. When used: - Performance Monitoring - Dividend Decisions - Exit Readiness 2. Divide the levered FCF by the initial equity investment amount. Levered Free Cash Flow Yield (FCFY) = Levered Free Cash Flow/Initial Equity Investment Key Considerations: No Universal Target: Varies by industry, capital structure, and debt terms. YoY Growth: Prioritized over absolute percentage; indicates improving cash generation and reduced risk. Downside Protection: Higher FCFY implies resilience against underperformance (e.g., EBITDA declines).

Answer 49

Calculate the unlevered free cash flow. To get to the unlevered FCF yield, the denominator would be enterprise value to match the cash flows. Unlevered Free Cash Flow Yield =Unlevered Free Cash Flow/Entry Enterprise Value Would tell the investor how the overall company is performing on an operational level, and it can tell us how much FCF remains to reinvest into the business and pay a dividend to equity holders, as well as the amount that can be used to paydown debt.

Answer 50

(When a private equity (PE) firm acquires a target via an LBO, writing up assets to fair market value (FMV) reduces the goodwill created in the transaction.) During an LBO, intangible assets such as patents, copyrights, and trademarks are often written-up in value. Recall that goodwill is simply an accounting concept used to “plug” the difference between the purchase price and fair value of the assets in the closing balance sheet – so a higher write-up means the assets being purchased are actually worth more. Therefore, a higher write-up of intangible assets means less goodwill will be created on the transaction date. Higher write-up means the assets being purchased are actually worth more. Therefore, a higher write-up of intangible assets means less goodwill will be created on the transaction date. Publicly traded companies cannot amortize goodwill under US GAAP – however, private companies can opt to amortize goodwill for tax reporting purposes. This question is specifically regarding the purchase accounting on the closing date of the transaction.

Answer 51

Financing Fees: Financing fees are related to raising debt or issuing equity. These fees are capitalized and amortized over the debt's maturity (~5-7 years). Transaction Fees: Transaction fees refer to the M&A advisory fees paid to investment banks or business brokers, as well as the legal fees paid to lawyers. Unlike financing fees, transaction fees cannot be amortized and are classified as one-time expenses deducted from a company’s retained earnings.

Answer 52

Is when the excess free cash flow after revolver repayments is used to make optional repayments on debt, assuming the debt tranche allows early repayments. In most cases, this optionality to repay debt early comes with a prepayment penalty fee since the lender receives reduced interest payments.

Answer 53

Companies need a certain amount of cash for daily operations and meet their net working capital (NWC) requirements.This minimum cash balance will increase the amount of funding required since this cash on the company’s balance sheet cannot help fund the transaction. The debt schedule will contain logical functions that ensure the cash balance never dips below this specified amount.

LBO Questions Flashcards

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