Case 019LBOCore

Paper LBO with the details people skip: transaction fees funded by equity and minimum cash left on the balance sheet. Work out the equity cheque, the MOIC and the IRR, and what the two items cost.

Bank of AmericaNew York · 2025

The situation

A sponsor buys Hemavat Pumps, which makes industrial and agricultural pumps, for 8.0x EBITDA of Rs 60 crore, Rs 480 crore. Lenders provide 4.5x EBITDA, Rs 270 crore, at 10%. Advisory, financing and legal fees come to 3% of the price and are paid by the sponsor at close. The lenders also require Rs 20 crore of minimum cash on the balance sheet from day one, funded at close as part of the deal.

EBITDA reaches Rs 85 crore in year 5, and cash flow over the five years repays Rs 110 crore of debt. The sponsor sells at 8.0x at the end of year 5; the Rs 20 crore of cash is still there and goes to the buyer as part of the price.

Your task

What is the equity cheque, what are MOIC and IRR, and how much return do the fees and the trapped cash cost?

Quick check

The Rs 20 crore of minimum cash comes back to the sponsor at exit. Does it still cost return?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The equity cheque is Rs 244.4 crore, and the deal returns 2.21x and about 17.2% a year. Fees of Rs 14.4 crore and Rs 20 crore of cash lift the cheque from Rs 210 crore. Exit equity is Rs 680 crore less Rs 160 crore of debt plus the Rs 20 crore of cash, Rs 540 crore. Without the two items the deal would make 2.48x and 19.9%, so together they cost about 2.7 points of IRR.

Step 1What goes into the uses column besides the price?

Everything the sponsor must pay for on the day the deal closes. Uses are the purchase price, the fees, and any cash the business must hold from day one; sources are the debt and the equity, and the equity is whatever is left over. Buying a flat works the same way: stamp duty, the broker and the deposit the society asks you to keep in the maintenance fund all come out of your own pocket, not the home loan. Here uses are Rs 480 crore plus Rs 14.4 crore plus Rs 20 crore, Rs 514.4 crore.

Sources and uses at close: two small bars that change the cheque, Rs crore480Purchase price8.0x EBITDA of 60Fees 14.4Minimum cash 20514.4Uses270.0Debt4.5x EBITDA of 60244.4Sponsor equity210 without fees and cashSources
Hemavat's uses are the Rs 480 crore price plus Rs 14.4 crore of fees and Rs 20 crore of minimum cash; with debt fixed at Rs 270 crore, the sponsor's equity rises from Rs 210 crore to Rs 244.4 crore to cover them.
Step 2What is the return?

Exit value is Rs 85 crore at 8.0x, Rs 680 crore. Debt is Rs 270 crore less Rs 110 crore repaid, Rs 160 crore. Equity at exit is Rs 680 crore less Rs 160 crore plus the Rs 20 crore of cash still in the business, Rs 540 crore, against Rs 244.4 crore in: 2.21x and 17.2%. The cash is added back because it is part of net debtDebt less cash. A buyer pays the sponsor for enterprise value less net debt, so cash left in the business is paid for at exit.: the buyer pays for it.

The relationship
MOIC=680−160+20480+14.4+20−270=540244.4=2.21×IRR=2.211/5−1=17.2%\text{MOIC} = \frac{680 - 160 + 20}{480 + 14.4 + 20 - 270} = \frac{540}{244.4} = 2.21\times \qquad \text{IRR} = 2.21^{1/5} - 1 = 17.2\%
680exit enterprise value, 8.0x EBITDA of 85
160debt left: 270 less 110 repaid
20minimum cash, funded at entry and recovered at exit
14.4fees, 3% of the price, never recovered
What it says in wordsThe return is exit equity over the full cheque, where the cheque includes fees and cash and exit equity includes the cash left in the business.
Step 3How much do the fees and the cash each cost?

Take them out one at a time. Fees cost about 1.6 points of IRR and the trapped cash about 1.3 points, about 2.7 together. Fees hurt more because the money never comes back. The cash hurts less but not nothing: Rs 20 crore that could have compounded at the deal's return earns 0% for five years. That is why sponsors negotiate the minimum cash level as hard as the fees.

CaseEquity inEquity outMOICIRR
No fees, no cash210.0520.02.48x19.9%
Fees only224.4520.02.32x18.3%
Minimum cash only230.0540.02.35x18.6%
Fees and cash (the deal)244.4540.02.21x17.2%
Rs crore. Hemavat returns 19.9% before fees and trapped cash and 17.2% after; fees, which are never recovered, cost more than the Rs 20 crore of cash, which comes back at exit but earns nothing meanwhile.

Note what the setup gave you for free: the Rs 110 crore of paydown. In a longer version you would build it from EBITDA, interest, tax, capex and working capital. When an interviewer hands you a number, use it, say you are using it, and spend the time on the parts they are testing, here the uses column.

Where candidates lose it

The common slip is leaving fees and cash out of the uses, so the cheque is Rs 210 crore and the IRR looks almost three points better than the deal really is. Interviewers add these two lines precisely to see whether you build sources and uses before calculating.

The opposite slip is putting the cash into the cheque but forgetting it comes back at exit, which understates exit equity by Rs 20 crore and the IRR by almost another point.

What the interviewer asks next

  • If the fees were funded by extra debt instead of equity, what happens to MOIC and IRR?
  • Lenders cut minimum cash to Rs 10 crore. How many basis points of IRR does that add?
  • Why might part of the fees be capitalised and amortised rather than expensed?

Asked at Bank of America, Industrials, New York, 2025 (Wall Street Oasis): typical techs from the guides like paper LBOs, DCF, accounting, and valuation

Company names and figures are illustrative.