You can click here to get the full solutions to this exercise, but we’ll present the highlights below: Paper LBO, Step 1 – Determine the End Goal The PE firm is targeting a 20% IRR over 5 years, so we have to complete this paper LBO and recommend or reject the deal based on this target. They provide numbers for the company’s revenue, EBITDA, cash flow line items, and the details of the Debt funding, such as the interest rates and principal repayments. In short, the PE firm is acquiring a company for 10x EBITDA and using 6x Debt to fund the deal. Paper LBO Example: Real Case StudyĬlick here to get the case study prompt for this exercise. More complicated assumptions, such as “cash flow sweeps,” make it too difficult to track the numbers and calculate everything with pencil and paper. It’s best to simplify the transaction assumptions as well, which means “ignore the transaction and financing fees” and “assume all deals are cash-free, debt-free” (i.e., that the target company’s Cash and Debt immediately go to 0 after the deal closes).įinally, you may assume that the Debt issued to fund the leveraged buyout stays the same or that 100% of the company’s Free Cash Flow is used to repay the Debt principal. If you finish most of the exercise and you can tell that the deal will generate nothing close to a 3x multiple, you can immediately reject it. It’s also important to start with the end in mind so you can check yourself along the way.įor example, if the PE firm is targeting a 25% IRR over 5 years, you should know that it corresponds to a 3x multiple of the initial Investor Equity (see: our tutorial on how to calculate IRR manually). To succeed with paper LBO tests, you must round and simplify the numbers as much as possible so you can finish the calculations within the time limit (often 30 minutes or less). Paper LBOs are not true “financial modeling tests” in the same way that other Excel-based exercises are they’re more like extended mental math questions. Companies like Shareasale, where bloggers and websites could offer his product in exchange for a commission on every sale.Paper LBO Definition: In a “paper LBO” test, a private equity firm describes the leveraged buyout of a company and asks you to approximate the IRR or money-on-money multiple in the deal without using Excel or a calculator. He needs to step up his marketing, get active on Twitter and other social media platforms and leverage the Shark Tank show, and play up the As Seen On TV opportunity.Īgain, Shane could take this to a company that has affiliate programs and market it through their channels. In the end, Shane is an inexperienced Entrepreneur who is going for his dream. People coming to the site have most likely seen him on the Shark Tank Episode, one of the most popular ever and he needs to capitalize on this opportunity. He needs to redo his Sweepeasy website, while clean and simple, he needs to put a focus on the product and a call to action to buy. Shane needs to redo his Sweepeasy video, with ways to call people to action, shortening the amount of time, it’s 9 minutes long, instead opting for thirty-second video’s demonstrating the product and then pushing them to the website to buy. He’s got a website, YouTube Video and a Twitter account, but his branding is not polished in the way that Kevin Harrington would have done. The question is what happened after the show? Did he complete the deal with the sharks? Less than half of the deals actually complete after the Sharks complete due-diligence.Īfter searching around for Sweepeasy, I believe that Shane did not complete the deal with the Shark Tank investors. The Shark’s bit on the deal, at least on the show. Shane hadn’t sold any Sweepeasy products leading up to the show, but is now selling online with his website. He’s a stay at home dad who invented this broom to make it easier to clean floors with his unique scraper attachment. Shark Tank Entrepreneur, Shane Pannell, introduced his product, Sweepeasy to the Sharks for investment.
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