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How A Private Equity Deal Works

The document summarizes how private equity deals work through leveraged buyouts and exits. It provides an example where a private equity group purchases 86% of Company A for $70 million by contributing $25 million in equity and arranging $35 million in debt. Five years later, after paying down debt, Company A is sold to a strategic buyer for $160 million, providing a total return of $105.8 million to original owners over the five-year period. The document also outlines characteristics private equity groups seek in companies and provides an overview of private equity trends and the firm CHILDS Advisory Partners.

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45 views2 pages

How A Private Equity Deal Works

The document summarizes how private equity deals work through leveraged buyouts and exits. It provides an example where a private equity group purchases 86% of Company A for $70 million by contributing $25 million in equity and arranging $35 million in debt. Five years later, after paying down debt, Company A is sold to a strategic buyer for $160 million, providing a total return of $105.8 million to original owners over the five-year period. The document also outlines characteristics private equity groups seek in companies and provides an overview of private equity trends and the firm CHILDS Advisory Partners.

Uploaded by

darthvader79
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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How

a Private Equity Deal Works


Transaction 1: Private Equity Leveraged Buyout
Private equity groups (PEGs) typically recapitalize companies with a mix of new Company A
equity, new debt and with the current owners “rolling”, or maintaining, a certain
EBITDA $10 million
portion of their equity. Most PEGs want the owners to own 15% to 40% of the
Company post‐deal. For illustrative purposes, we assume Company A has $10 Multiple 7.0x
million in EBITDA and a PEG purchases 86% of the Company. Enterprise Value $70 million

  Sources of Cash Uses of Cash


PEG Equity $25 million Purchase 86% of Company $60 million
New Debt (3.5x EBITDA) $35 million Owner Equity Roll $10 million
Owner Equity Roll $10 million
Total $70 million Total $70 million

Post‐deal equity ownership:


Equity Value Ownership Percentage
Impact to Owners:
PEG Equity $25 million 71.4%
Cash to owners day 1: $60 million ($70
Owner Roll $10 million 28.6% million less owner equity roll) before
Total $35 million 100.0% any expenses and taxes

What happens in the next ive years?


The Company continues to perform well and doubles EBITDA to $20 million, making it worth $160 million at a
multiple of 8.0x. During the ive‐year period, the Company paid down the $35 million in debt.

Transaction 2: Sale to Strategic


Company A ( ive years later)
Impact to Owners:
EBITDA $20 million
Multiple 8.0x ▪ Cash to rolling owners in Transaction 2 is $45.8 million
▪ Total value to owners in 5‐year period is $105.8 million ($60 million +
Enterprise Value $160 million
$45.8 million)
▪ Scenario to illustrate the classic “second‐bite‐of‐the‐apple” effect

Equity Ownership: Other important notes:


Equity Value Ownership ▪ PEGs often set up management equity incentive plans
PEG Equity $114.2 million 71.4% for non‐owner managers (generally 10‐15% of the
upside)
Owner Roll $45.8 million 28.6%
▪ No external signs that a transaction has occurred
Total $160.0 million 100.0% ▪ No brand or culture change
Company Characteristics that Mean the Most to PEGs

▪ Strong, experienced management team


▪ Strong margin pro ile and history of positive cash low
▪ Revenue visibility and certainty
▪ Differentiated strategies and/or processes
▪ Growth opportunities

Private Equity Trends


Percent of Deals by Buyer Type PEG Overhang
$800
100.0%
90.0% $700
80.0%
$600
70.0%
$436
60.0% $500
Billion
50.0% $400
40.0%
30.0% $300

20.0% $200
10.0%
$100
0.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 $0
2006 2007 2008 2009 2010 2011*
Strategic Financial $ in Billion
Cumulative Overhang
*Through Q4 2011; Source: PitchBook 

Recent High‐Pro ile Transactions

Capital Partners

About CHILDS Advisory Partners

CHILDS Advisory Partners provides exceptional investment Alan Bugler


banking services to high‐performing business services and Vice President
technology companies in the middle market. Our combination Business Services
of sector focus, proven processes and entrepreneurial edge
Private Equity Coordinator
set us apart. Collectively, our senior bankers have executed
over 350 M&A and inancing transactions. CHILDS, a member Phone: (678) 735‐5320
of FINRA and SIPC, is a registered broker‐dealer.   Email: abugler@childsap.com  

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