So good to see everybody. As you can see from the screen, my name is Phil Sparks, and I'm a full-time trainer at Financial Edge.

My background is I qualified as an accountant something like 20-odd years ago, and then spent about 10 years or so in industry, in various commercial companies.

And also, I then spent about 10 years training, firstly, for a company called BPP, and for the last five years for Financial Edge.

So, and LBO is absolutely my bread and butter, the kind of thing that I teach very regularly.

You can grab the four Excel files. So I'm going to start with... First of all, I'm going to get rid of that from the screen.

Open up here.

Okay, I'm going to start here. Okay, so apologies for the handwritten drawing on the screen, but I'm just going to look at two slides, two diagrams, which basically encapsulate what an LBO is, a leveraged buyout.

And basically, it's about buying a company and then five or six years later, three, four, five years later, something like that, selling that company.

So how do we make money from doing that? Well, the argument goes something like this.

You buy a company, and you put equity in.

It's normally a PE firm, a firm that does that.

But you borrow as much as you possibly can to help finance that acquisition. So, and hopefully, you're all reasonably familiar with an EV to equity bridge. So you buy a company, you buy its enterprise value, which is basically shortcut or a shorthand for buying a company and refinancing all of its debt, and you finance that by raising a mountain of new debt as much as you can.

60%, 70%, something like that, would be absolutely typical.

And then the balancing figure is the equity that you put in.

You hold that company for three, four, five years, something like that.

And during that period, that's the kind of the black line I've got here, the enterprise value, the trading operations of the business, as far as possible, you use all of that cash generation to basically pay down the debt, to reduce the amount of debt that you borrowed to help you buy the company. And in doing that, the debt shrinks.

Now, if that was all that happened, that'd still be good news.

You shrink the debt, the equity would grow, as the balancing figure, and therefore you'd come out having hopefully made a healthy profit.

You get more equity out than you put in.

But what you also hope to happen is you're going to try and grow the enterprise value as well.

So you make what are sometimes euphemistically called operational improvements. A lot of the time, what that means is squeezing costs, cutting costs, making the business more efficient.

And in doing so, you cut costs, you make the thing a little bit more efficient.

You therefore grow its profitability.

If you grow its profitability, the enterprise value grows as well.

So the enterprise value grows, the debt shrinks, and therefore the equity hopefully grows enormously.

And after your four or five years, you exit, and you make a very healthy profit by doing so. So that's it.

That's how an LBO works. It's just a very particular form of acquisition with more debt than would be common.

Okay, I'm going to look at one more, which is a really nice diagram.

I like this diagram a lot. So basically, this gives you some features of a typical LBO. Let's start at the top. We buy a company.

It's an acquisition transaction. Normally, it's 100% purchase.

You don't want the complexity of sharing the ownership with somebody else. The acquirer is a financial sponsor.

What that basically means is there's no synergies.

This is not Coca-Cola buying Pepsi, where the two businesses have a lot in common. This is a financial acquisition, a PE firm that doesn't have any expertise in the operations of the company buys a business. And so it makes operational improvements largely by cost-cutting, by squeezing it, by making it a little bit more efficient.

Typical investment horizons, three, four, five years, something like that. If you actually do the maths, if you do the numbers, if you hold a business for longer, it tends to be that the IRR, which is a typical way of appraising an LBO transaction, the IRR tends to fall the longer you hold it. A lot of it is financed by debt, which makes absolute sense. We know that. The clue's in the name.

It's a leveraged buyout. Ability to generate cash flows and repay debt is key. I think that is the absolute fundamental here. You basically want to buy a company where they're steadily turning profits into cash.

So therefore, they're often quite stable, mature businesses.

This is not the sort of acquisition where you buy a business that's got great plans for the future, needs loads of investment, lots of R&D, lots of CapEx, because that absorbs cash. What you want is a relatively steady company, that turns profit into cash, and then you use that cash generation to reduce the debt. And then this final point, operational improvements are integral to increasing cash flows.

Now, I'm perhaps selling them a little bit short.

Of course, PE firms invest in businesses and look to grow those businesses.

But they're very careful about doing that, about how much cash they spend, because any dollar you spend on growing the business is a dollar you're not spending on reducing the debt. So a lot of the times, they'll be looking for efficiency savings, maybe selling off unused assets, and so on. Okay, so let's go and look at an example.

So, that's all I'm going to do in terms of describing what an LBO is. We're now going to dive into a fairly substantial model, and we're going to spend the remainder of our time, the remaining sort of 45 minutes or so, going through a fairly substantial Excel spreadsheet, basically doing an LBO transaction.

Okay.

I can see we've had a few more people.

If you haven't picked up... the spreadsheet on the way in. I've just put in the chat box a link to four spreadsheets. If you grab these four spreadsheets and open up, and it should be on the screen right now.

If you open up this one, it says LBO European Case Empty. So if you want to grab that spreadsheet, that's what we're going to walk through over the remaining 45 minutes or so. So very briefly, this is a typical LBO transaction. We're forecasting the business and the business's profitability. We're forecasting its cash generation, but the most important thing we're forecasting is we're forecasting its ability to reduce debt, to pay down debt with those cash flows. And then right at the very bottom, we're going to look at the equity that the institution put in and then got out after, in this case, four years.

And we're going to see if it's gone up, and we're going to work out the IRR on that transaction. And if it's a nice, healthy, positive number, typically PE firms will be looking for high teen, 70 and 80%, maybe up to the mid-20s, to basically persuade them that this is a good deal.

So just have a very quick look through the shape of this spreadsheet before we start filling it in together.

And of course, you can fill it in along with me, or you can just download the spreadsheets, look at the solution, follow me as I walk through it, and do it in your own time later.

Just a quick mention, as I say, there are four spreadsheets.

Two of them are this one, the LBO European Case.

There's an empty version and a full version, so there's a solution file already.

And the second two spreadsheets are a small section of workouts, a number of different small exercises that are all really about construction of an LBO.

So if you grab that, you've also, again, got an empty version and a full version, a version that you can play with, that you can try, and then a version with the solutions. Okay, so let's have a little look through the shape of this.

The first thing we've got at the top are basically consensus estimates.

Now, this is for a business called TeamViewer, which you may well have come across. It's a European business.

It's an existing business, a real business, quite successful business.

And what it makes is a piece of software that enables you to take over another computer remotely.

Where can I find that Excel so I update it? I just put it in.

If you go to the... I'll just put it in again in the chat box. If you click on the link that's in the chat box, that should take you there, and you should be able to find four spreadsheets down there. Okay.

So TeamViewer, real company, makes this clever bit of software.

You often see this within IT support.

You've got a problem with your computer, you phone IT support, they log on to your machine, they can control it remotely, and they'll be using a piece of software like TeamViewer. So real business.

So at the top are the consensus estimates for this.

Now, we downloaded these, put this model together tail end of last year at about September, October of 2025.

So the year end, the last full year end for this business is December 2024. We had six-month interims until June 25. So we've constructed an LTM set of numbers for the revenue and EBITDA that enables us to do things like LTM revenue for cost savings. And then we've got consensus estimates from the analysts for full year '25, '26, and '27. And we'll use those to drive our forecast results that we can then use to drive the cash generation and debt repayments.

A few things worth looking at. We've got some basic information here.

So its share price is 8.9 euros per share.

We're assuming a 30% premium to buy this business, which is, it's a listed company. This is what you have to pay, which gets us to 11.6 euros per share. We've got some basic shares.

We've got some dilution calculation, which gives us, when we multiply it all together, an equity value. This is what we'd need to pay to buy this business, a cool 1.85 billion euros. They've got some fairly substantial debt on the balance sheet.

There's an assumption that we would refinance their net debt, so that debt, the loans, the leases, and also less cash to refinance the net debt.

And that gets you down to a local enterprise value of $2.8 billion. Okay. We've also then got some assumptions here, things like tax rates, 29%, things like acquisition fees, 2%, and so on. We've got, and I've just highlighted the numbers that I think are really key. We've got a risk-free rate, European risk-free rate, which we're using to drive two pieces of debt. So as is very common with an LBO, you would basically have a range of debt, a suite of different forms of debt.

So we've just got senior debt here and junior debt.

Obviously, the senior debt has a lower interest rate.

The more junior debt has a higher interest rate.

The more senior debt gets repaid quicker.

The more junior debt gets paid later.

We've got a little bit of interest on cash.

We've got some debt limits. So there's a debt limit here of five times EBITDA, which is not uncommon.

Anything beyond three or four times EBITDA for a normal trading organization is pretty high and would have the banks very nervous.

If it's an acquisition, if it's an LBO acquisition, the banks would be comfortable with a slightly higher level of debt. But still in this case, they've got a maximum of five.

I would say five to six is kind of typical for a regular LBO acquisition as a maximum level. You, of course, can see much higher numbers in various cases, but that sort of five or six level.

Often the SEC in the US has that as six times as a limit. Okay. And another exit, another point down here.

We're assuming initially that we will exit in year four, but we want to make our spreadsheets flexible.

So if we change that, if we made it three years, four years, five years, what would it do to our returns to the equity providers? And then finally, we've assumed that we've got that 30% premium on their share price, which is how we valued the business on entry, and that gives an 8.2 times to EV to LTM EBITDA.

Phew, get those words out.

8.2 times. And we're assuming, therefore, that on exitWe'd value the business in exactly the same way, which is a reasonably standard assumption to make. So off we go.

First thing we need to do is with any acquisition, do a sources and uses of funds. So basically, what did we pay to acquire this business, and where did the money come from? So we'll start with our sources.

The very first thing that we need to do is buy the equity.

So where's the equity? Well, we've just calculated that just above, and it was at one point something billion. There we are, 1.857 billion euros.

And I'll put the formulas, I'll put the references alongside. There we are.

Next thing, we're going to refinance their net debt.

So you'll remember they had something like a billion euros of long-term debt. That's somewhere up there.

And I'm just going to do this with my mouse because it's a little easier.

Plus the leases, let's assume that we have to refinance the leases, subtract the cash, and that gets us to net debt refinance of 995, just less than a billion euros. Okay. And the final thing that goes into the uses of funds are fees, and you'll remember, hopefully, that there's a fee of 2%. There we are, 2%, but it's not 2% of the equity, it's 2% of EV, which is a very typical way that these things are calculated.

So we take that 2%, and we then multiply by the EV just above, and we get a fee of 56.6. Alt equals at the bottom, one of my favorite keyboard shortcuts for a very quick adding up.

So we end up with the total uses. What about sources? Where is it going to come from? Well, what you would normally do with an LBO is you borrow as much as you possibly can. So that's what we're going to do.

We're going to say I am going to go with senior debts to EBITDA of 3.5, and it's LTM EBITDA. So the point where we took it over, we'd go and look at the EBITDA to the nearest of 12 months just before, multiply the two together, and that would be our maximum debt.

So we're going to go equals 3.5 multiplied by LTM EBITDA, which is that June figure in the middle.

There we are, 344. And for some strange reason, I've popped that in the wrong column. Okay, so that's our senior debt, 1,204, and then we'll do exactly the same with junior debt.

We'll go and grab the rate, which is 1.5 times multiplied by the same LTM EBITDA number, 344.

There we are, and we get 500. And then the equity is just the balancing figure. And again, exactly how it would happen if you were doing an LBO in real life. So, I'm not going to call it... In fact, I'm actually going to call it common equity injected. How about that? Rather than getting confused with the equity we're actually buying.

And that's simply the balancing figure.

So we'd basically say 2,909 minus the sum of the two figures just above, and it gives me that number there.

And alt equals at the end, and we get a total sources of funds.

I'll just make this a little bit bigger just so it's a little bit clearer on the screen.

There we are. Okay. So we've got our total source and uses of funds set up. It is worth just pausing at this point.

It's worth pausing at this point, because it's easy to just get sucked into the numbers, do all the calculations, and not really stop and think a little bit.

Couple of points worth making. The first is, if I just highlight the total debt and look at the bottom of the screen, you'll see that in total, we've borrowed 1.7 billion of debts, and we have in a line underneath, 1.1, 1.2 billion of equity. Now, I'm not going to do a real hard calculation here, but to me, that looks something like about 60% debt, 40% equity. That sounds okay for an LBO. Remember, we're borrowing very heavily, and then as far as possible, using the cash that the businesses generate to reduce that chunk of borrowing, and that gives us almost a magnifying or an amplifying effect on the equity injected. Okay? Second thing is why is that happening? Why have we managed to be able to borrow a very significant portion of the value that we're paying for? And the reason why is it's the balance between this multiple here and that multiple there, the maximum debt to EBITDA.

So we're buying a business with a multiple of 8.2 times LTM EBITDA. So the total cost of buying the business and refinancing its debt is 8.2 times. And of that, we are borrowing five times, to finance it, five times EBITDA to raise debt. So effectively, the equity is the balancing 3.2 times. Now, what that means is if you're going to be able to buy a business and you're going to be able to buy it for a multiple of seven or eight or nine or 10 times EBITDA, it's probably going to be a plausible LBO target.

Whereas if you saw a business and it was trading at something like 20 times EBITDA in terms of its multiple, its valuation multiple, it's never going to be a feasible LBO because you're never going to be able to borrow enough because it's a very highly valued company. So it tends to be stable companies, companies that are not going to grow that much, which tend to have those relatively low multiples and therefore make good LBO targets.Okay, let's move down a little bit.

So what we're going to do next is we're going to move on to the actual construction of the income statement, the cash flow, and then finally the debt schedule. So we've got some numbers up here. You can see that these are hard-copied-- Sorry, not hard-copied numbers. These are calculated numbers here, and that's because they're based on those consensus estimates.

So that revenue growth percentage is basically it working backwards from the consensus estimates for revenue and for EBITDA. And then we've got these hard-coded numbers out here, these assumptions, and we're assuming that that initial very strong revenue growth gradually tails off to something much more steady and much closer to long-term GDP growth. You can also see that the EBITDA margin stays pretty much flat throughout.

We've got to be just a little bit careful with this line here.

We've got a share-based compensation assumption. Now, normally, businesses, when they present their numbers, will have non-GAAP measures, and they will basically take out share-based compensation from their figures to get a normalized or cleaned EBITDA figure that they present as a good representation of the underlying business.

And therefore, analysts would normally not assume that EBITDA contained share-based compensation.

The rationale would be is, first of all, it's a little bit uncertain whether people are going to get it or not, and secondly, there's no cash impact anyway.

It's just issuing shares. So we need to be a little bit careful with the share-based compensation. It is a real cost of the business.

It is something that the business is going to have to put through its income statements, but at the same time, it's non-cash.

And when we are doing the exit calculation, how much the business is worth at exit, then we need to make sure we don't include that share-based compensation. We've also got here some operational improvements, which you can see are gradually growing. Be careful, these are not synergies.

These are basically efficiencies, improvements in profitability.

And the rest is relatively straightforward.

So let's go and do our forecast. So what we will tend to do is to put some forecasts together to capture all of these items and then just put them into an income statement and a cash flow. So let's go.

First thing we're going to do is do our revenue.

Different ways I can do this, but I'm going to start simply by taking the forecast revenue, right up at the top here, and it's that number there, 773. Is that right? Yep, 773. There we are.

But in the next year, what I can do is I can basically use this revenue growth to grow my revenue and then carry this whole set of numbers onwards. So equals one plus that revenue growth multiplied by the previous year, and I get 838.

Do I like that number? Yes, I do. Okay.

And then we're just going to work our way down.

So it says EBIT before share-based payments.

So we're basically going to say, here's my EBITDA margin, 41%, multiplied by the revenue, and there I am. I'll just put formulas over on the right-hand side.

There we are. Share-based compensation expense, let's include that. It's two and a half percent of revenue is our assumption. That's 21.

Yep, I like that. Operational improvements.

Now, I've got to be a little bit careful here.

It says 0.5%, but it's not 0.5% of the current revenue. It's 0.5% of LTM revenue. It expressed in the same way that synergies would normally be expressed. So we're not going to constantly grow these operational improvements. We'll grow them over the first few years, and then they'll flatline. Okay? So we're basically going to take that 0.5%. We're going to multiply that by the LTM revenue, which is somewhere up there, and we're going to lock it in with an F4, and we get that number there, 3.8.

Copy that to the right, and you'll see it'll gradually go up.

CapEx, we've got a 3% of revenue. Very common way of forecasting capital expenditure.

If your revenue grows, you'd imagine you need more assets to support that.

D&A, here's an interesting one. The D&A is 75% of CapEx, except it's not.

Look really carefully. It says CapEx is a percentage of D&A.

CapEx is 75% of D&A. So actually, our D&A is bigger than our CapEx. So what we need to do is we need to take our CapEx number and then divide by that 75%, and we end up with 33.6. And that's very common in these sort of relatively young tech companies.

They spend an enormous amount on capitalizing development costs and so on. And then once the thing is up and running, basically D&A is very high, but they don't need to do much more than just replenish or just top up that sort of infrastructure that they have got.

So you often find this with D&A being higher than CapEx in the first handful of years. Okay. And then finally, OWC.

Got to be a little bit careful with this.

We've got 54% multiplied by revenue.

That's what the thing says.

That's what the assumption is. But be careful, this is negative, i.e. the liabilities are greater than the assets in terms of operating working capital. And the rationale goes something like this.

These businesses often have upfront revenue.

People pay for subscriptions at the beginning of the year.

So the entry is cash goes up, deferred revenue goes up.

That deferred revenue sits in operating liabilities, and gradually it sort of gets amortized through the revenue line during the year. Okay? That's why it's negative.

Got to have to be careful with this when we get to our cash flow, that we get the cash flow the right way around.Okay, copy this all the way to the right, and there's our assumptions. And now we're in a good place.

We can basically put together our income statement.

Remember, we only need to do this from 2026 onwards because we bought the business at the end of 2025. So here we go, EBITDA, but this is EBITDA minus those share-based payments and plus those operational improvements, and it gets me that number there, 329. Then I add back D&A. Sorry, I put D&A here. Got to be careful, I started with EBITDA, so then I subtract D&A from the EBITDA number.

Just pop that down.

And I'm going to leave the interest for the moment.

Interest, we're going to end up calculating interest once we've calculated debt and once we've calculated interest on that debt. But I still need to put it in. I need to leave a space for it and do the subtotal.

So I'm going to assume that my interest is going to be an expense but is going to be presented as a positive number as an expense.

So I say 295 minus the line just above, and obviously, the number is the same, but I'm now confident that when I put that interest expense in that line, it'll work. I can then take the tax, so I need to somewhere go and work out the tax. I've got somewhere up here, remember it was 29 something. There it is, 29.5% tax.

Lock it in with an F4, multiplied by the PBT, and I get that number, 87.2. And now I can simply say PBT minus tax gives me profit after tax, 208.5. There I am.

If I'm happy with all of that, I can copy it off to the right, and I've got sensible numbers.

Okay. Next, here comes the fun stuff.

Here comes the real crux. And where are we? We're just before half past, so we're okay. We're just about on time.

We'll be able to get through this, but this is the real crux of an LBO.

So what we're going to do here is we're basically going to say, I'm going to start with net income.

And that's easy. That's just simply the line just above, that 208.

Yeah, 208. Sorry, I was looking at my notes and looking at the wrong line, which confused me. Okay, so what we're going to do here is we're going to construct a cash flow.

But it's not a whole cash flow. It's like a cash flow that has the operating cash flow and the investing cash flow, but nothing in the financing.

And so what we're doing here is we're looking at how much the business is going to generate in terms of cash before they get to the debt element, before they get to the financing section. And this is going to enable us to say, "We've got this much cash.

How much of that cash can we use to reduce our debt?" And that's exactly what we need to do with an LBO. Okay? If you've ever done a free cash flow when you've been doing valuations, pretty much the same as a free cash flow. So we start with net income, and then we add back depreciation.

Where is that number? Somewhere up here.

So there we go, 33.6. I'm just going to put formulas alongside so you can see.

And we subtract cash CapEx.

So somewhere up here. And this is why we produce that table of figures because we're just constantly going to be looking at that table of figures and pointing to it. This time it's negative, so CapEx is a negative for cash, so we go times minus one, and we end up with minus 25.2.

Next, we want to look at movements in OWC. And I'm just going to pause at this point because you've got to be ever so careful with this.

422 to 458, but these are negative items, and it's not always intuitive which direction.

Well, maybe it is for you. Maybe you're much cleverer than I am, but I always have to stop and think about this. Which direction is this? Is this good or bad when I get to my cash flow? The way I often think about this is, what if I only had one item, one balance in my OWC? In this case, it would be an accounts payable balance. It's a negative item.

Overall, it's a liability. Well, if it's an accounts payable balance and I wanted to make that number go smaller, so from 422 to 400, what would I do? I would pay that supplier. So if I paid a supplier, the accounts payable balance would go from 422 down to 400.

So if this number gets smaller, it's bad for cash.

I've paid the supplier. This is the other way around.

Basically, it's 422, and it's gone up to 458, so that must be good for cash. Now, if you think what this balance probably is, it's deferred revenue. That basically means people have given us cash upfront, given us cash at the beginning of the year, and gradually, we will take that balance out and shift it to revenue, so it's deferred revenue.

So this number is going up, and it's good for cash.

So when we get down to this balance here, sorry, this amount here in the cash flow, we need this to be positive.

And so the way we do that is we take last year's number, and we subtract this number. 422 minus minus 458 is the same as 422 plus 458. Plus 458 is going to push it positive, and so we end up with a positive 35.8. Phew. There we are. So do an alt equals at the bottom, and that gives us 252, and we're going to call that-Cash below available for debt repayments. There we are. We've just got two elements to do, two lines to finish, and we'll get to the actual debt schedule part of this.

And what we're going to do now is we're going to put in the opening cash balance. So the rationale goes something like this.

If you were doing a real cash flow, you would basically say, "What's my closing cash?" You would basically say, "It's the opening cash plus the cash flows.

That gives me my closing cash." Well, if we had an opening cash balance and we were looking to repay as much of the debt as we possibly could, well, we'd use some of our opening cash to do exactly that. So we need to include the opening cash balance. And this is one of those slightly scary spreadsheet entries where we're not going to look at the same column, not going to do that matrix integrity. We're actually going to go to the previous year.

And so I'm going to find, and here it is, it's hard-coded, I'm going to find that opening cash balance, which is zero.

Now, the rationale for that is we refinanced the business. We basically paid off all of the debts, and if they had any closing cash, we used that to help us pay off the debts.

So there's no cash left. We're starting our LBO with zero cash.

And then we can basically say that is the cash available for debt repayments.

And we simply add those two numbers up.

Now, you might sort of wonder, what's the point of doing this? Because at this point, there is no opening cash, and we know that we're going to use all of the cash that we generate to repay debt. So it's unlikely that this number will be positive for the first few years, and you'd be absolutely right. And it's actually quite a good check that your LBO is working. However, in the later years, when we've paid off the debts, gradually, this number would increase, and you'd expect it to increase. Okay? Okay, so let's go. So here comes the fun stuff.

Here comes the debt schedule. So what we're going to do now is we're basically going to look at each of the components of debt, each of the tranches of debt.

And we're basically going to say, how quickly can we pay them off with this cash that we've got up here? So what I'm actually going to do is I'm just going to copy all of that to the right so we've got a full set of the numbers.

And it is just always worth just a little pause.

What's actually happening? Well, if I look along this line here, basically because we've got our revenue gradually growing, our profit grows, and therefore our cash that we're generating grows. And it's not an enormous amount.

The rise is not that huge, but you can see it gradually sort of easing up every year. That's what we'd expect with a relatively mature, stable business like this.

Okay. So next, we're going to go down to our senior debt, and we're basically going to look at each of our pieces of debt. I'm going to see how quickly we can pay them off.

So my closing senior debt at the end of December 2025 is, let's go and find it. It's from our sources of funds somewhere up here.

There it is. It's that number there, 1,204, from our sources of funds.

Okay.

And while I'm here, I'm just going to do exactly the same for the junior debt, just because I want to remember. I want to just pop that in because I can remember where it comes from.

And it goes up here from our sources, junior debt, 516. There we are.

Okay. Now go back to the senior debt.

So that closing figure right at the end of December 2025 becomes the opening figure at the beginning of January 2026. And then we want to work out how much we can possibly repay. Now, it's very tempting to just say equals 252 multiplied by minus one. So we repay, as we use all of the cash that we've got available to repay the debt, and for the first few years, that's absolutely fine. We do an alt equals at the end, copy that to the right, and you'll see that gradually we repay the debt. But the problem is that we carry on repaying it even when it's fully extinguished.

So we need to be, hit Control-Z, we need to be a little bit cuter. So what we're going to do in this middle formula is we're going to put a minus min.

We're going to say equals minus min, and we're going to do the lower of either that brought forward cash, so we're going to use all of that cash if we possibly can while we've still got a big chunky debt balance, or the brought forward balance. And so when the brought forward balance becomes lower, when it's largely paid off, we're just going to pay off the remaining debt rather than use all of the cash that we've generated from our cash flow.

And that hopefully will work. And if you've ever done a cash sweep before, you'll hopefully recognize that minus min approach.

Really, really useful approach. You could do it with an if statement if you're clever at Excel, and I'm sure you all are, but minus min is a very elegant way of doing that. If I copy that to the right, Control-R, you can see it gradually pays off the debt until this year here, when we've got 324 cash generated. Debt is only 65, so we pay off the remaining 65 and then stop.

While I'm here, I will also do the interest calculation.

So first thing I do is I go and grab the interest rate, which is somewhere up hereThere we are.

Senior debt interest rate, 4.2. I lock that with an F4, and I'm going to multiply that by the average of the opening and closing debts balances. Okay.

And the rationale for that is the debt moves hugely every year because we're paying off so much of that debt.

It starts at 1,204, ends up at 951. So if we only took the interest based on the opening debt, we'd be overstating the interest. Our interest charge would be too high, and the bank would never let us get away with making the interest linked to the closing debt.

So we're taking an average of the two.

Copy that to the right, and you'll see that the interest element falls gradually as the debt falls.

We do exactly the same with the junior debt.

So we've got an opening position of 516.

We do exactly the same with the repayments.

We say equals minus min, and our minus min is of the opening debt, 516. But we need to be a little bit careful.

We can't just point to this amount here.

Because we've used it in repaying the senior debt.

So we need a combination of that 252 generated, plus any that we've used within our senior debt element. Okay? Hit Return, and of course, it's zero in the first couple of years, and that absolutely makes sense. Now, I'm just going to copy this to the right, see what happens, and you'll see we pay off zero. Nothing at all on the junior debt until this year here, where we've repaid the senior debt in full, and we've still got some cash left over, at which point we start paying down the junior debt.

And then here, by our final year, it's all gone, all paid off.

We can do our interest calculation just the same.

So we say equals, let's go and grab the interest rate somewhere up here. There we go, 6.2%, lock it with an F4, multiplied by the average of, again, the opening and the closing.

And what I'm hoping is that if I copy this to the right, it'll be exactly the same number every year until right at the end when we start paying it off.

Control + R, and that's what we see. Okay? Final year, all paid off, no interest. Excellent. So we're almost there.

So we've done our debt schedule.

All we need now is to do the cash. We're going to calculate the cash. Now, remember this, it was zero.

Now, we expect this to be zero for most of this forecast because we're using all of the cash that we're generating to repay the debt. There shouldn't be anything left. Okay? But what we're going to do is we're going to say equals, and I'm going to go up to the top and somewhere.

I had, oh, gone far too far.

There I go. I'm going to go to this 252.

So this 252 is the cash that we have generated during the year, plus the beginning cash, but then it's before we make payments in paying down any of the debt.

So I'm going to add on those two repayments lines, and my check is that this is zero, which it is, and it should be zero for the majority of this period. But if I copy this out to the right, you'll see it stays zero until the very end of the almost last year, at which point it starts to build up, and then I end up with this number here, 418. Okay, excellent.

So last thing to do on the cash and debt is to do the interest calculation on cash, which will be a very small amount, but I think we had 1% interest rate on cash somewhere up here.

There it is. Interest on cash, 1%. Lock that in with an F4 and do the exactly the same. The average of the opening cash and closing cash balance, and again, we'd expect it to be zero all the way until the very end, and we just end up with a very small amount of interest income at the end. Okay, we're almost done.

There are two things to do. The first thing is, I just want to include the interest in the income statement.

And if you haven't done a cash sweep before, if you haven't done a full three-statement model with iterations before, just bear with me on this. We're basically going to create a circular reference. Now, I'm going to do Alt, F, T, and I'm just going to show you what happens.

I'm going to turn off iterative calculations, and then I'm going to show you what happens if we just link interest into the total interest, and then I'll show you how we solve it. So we're going to go up to our income statement. We've got that missing line there, which is interest expense. I'm going to say my interest expense is equal to the interest on the senior debt plus the interest on the junior debt, minus the interest on cash. And I hit Return, and it tells me I get a circular reference. And the circular reference is between those interest amounts and the income statement. Just tell you why that's happening.

It's happening basically because the interest is a function of the closing debt and cash balances.

However, the interest in the income statement drives net income, which in turn drives the cash available for paying down those debts. So the debt relies on the interest, but the interest relies on the debt, and Excel doesn't know what to do.

Okay, so I'm going to do two things.

The first is we're going to go AltFT.

And we're going to do something. We're going to turn on iterative calculations.

And what the iterative calculations does is it says to Excel, "Work around that circular reference up to 100 times and see if you can solve it." And in this case, it works.

It's gone to 78.3. The second thing we're going to do, though, is we're going to modify slightly that formula. So I'm just going into it, and I'm going to do an if statement.

And I'm going to do if, and I've got a switch on the info tab called circ switch, and I'm going to basically, I want to be able to turn on or break the link between the income statement and that interest calculation.

So I'm going to type circ switch, and you'll see if I start typing circ, and it says, "Do you mean circ switch?" And I accept that with a tab.

So if circ switch is one, then I do that calculation.

If circ switch is not one, I basically put zero in my interest line, and so I end up with zero in my interest line. Don't worry about it, it'll all come good in a minute. And the rationale for this is it's not good to run your spreadsheet without iterative calculations on all the time.

It potentially creates an unstable spreadsheet.

So I need to be able to turn off iterative calculations and turn off that link between interest and the income statements.

If that's not clear, recommend go and have a look at our Felix videos on three-statement models. Okay, so I'm going to go back to where I was.

I'm going to turn that circ switch on.

I'm going to go back to my LBO.

Now, I need to just Alt, FT. I need to basically turn off and on the iterative calculations.

Okay.

Alt, FT, turn them back on.

And sorry, I need to just turn that circular switch off just for a moment.

Alt, FT.

Copy that all to the right.

Okay, so I've now got my interest is off, and you can see that this is all a bit unstable. So I'm going to go back to my info tab.

I'm going to turn on the circular switch.

I get the circular reference. I go Alt, FT.

I turn on my iterative calculations, back to my spreadsheet, and it works. It works.

But it is a really unstable thing. So that's why we have that switch where we can turn that on and off.

Last thing to do, basically, we just want to look at our returns to the shareholders. Now, just before I do that, I'm just going to do a little calculation here of how quickly we are repaying our debt. Okay? So what I'm going to do is I'm just going to do a little calculation.

First thing I'm actually going to do is I'm just going to do a little running total of debt repaid. So I'm just going to do cumulative debt repaid.

I'm just going to do a little calculation.

So I'm going to say equals last year, and I know it's nothing, but that's okay. Plus...

Sorry, I need to make that minus because it's minus, minus that 197 of senior debt repaid, minus the repayments of junior debts. Okay? And what we basically get here is we get 197 in the first year. Copy it to the right one year, and it's basically adding on the total of all of the debt we've repaid.

Copy that over to the right, and you can basically see that eventually it stabilizes, and we've repaid all of the debt.

Now, I'm just going to do underneath that a little percentage.

So I'm going to do a percentage of that cumulative debt repaid, 197, divided by the opening debt that we took out, lock that with an F4, and the opening junior debt, again, locked out with an F4.

Hit Return, and I've paid 11% in the first year.

Copy that to the right, and you can see it's gradually growing, 24.7. And if I get right to the very end, Control, R, you can see I've paid it all off. Now, why I do this is because for most LBOs to get through the credit committees of banks, basically, if you're lending to an LBO transaction, they would want to see that you had paid at least 50% of the debt after seven years.

And in this case, it's fine. We've paid pretty much everything off, one, two, three, four, five, six, after seven years. So it's fine.

But that's a really good metric. It's a metric that banks will want to see. Okay, so the final element is, is this any good for our shareholders? So we're basically going to do a year counter. We start with one.

So we're just going to put a year counter, and we'll copy that to the right in just a second.

And the reason for that is because you might remember, we said we were going to exit in year four. So we need to work out what the numbers look like in year four. Okay? So what we're going to do is each of these years, we're going to calculate the enterprise value. Now, you might remember a very long time ago, we basically talked about 8.2 as a multiple, an opening and a closing multiple.

We're going to take that 8.2 times, function F4, lock that in.

And we're going to multiply that by...

And what we want is a combination of the EBITDAR and the operational improvements.

So I'm going to go up to the EBITDAR up hereAnd there I've got EBITDA 346, plus the operational improvements of 3.8.

And if you're kind of following this, you might say, "What about the SBC? What about the share-based compensation?" And you might remember me saying that analysts, when they are valuing businesses, would generally not include costs of share-based compensation within the income statements, within the EBITDA number of a target company. So that's what we're doing here.

We're basically saying EBITDA, not including the 21 cost of share-based payments, but including the operational improvements.

I hit Return, and that gives me an enterprise value of that figure there. And you can see it's growing nicely.

And I will copy all of this to the side in just a moment.

Next, what's the net debt? Well, the net debt is easy to do.

We basically say, what's the closing senior net debt? What's the closing junior net debt? And it's that number there.

And I quite often do this, where I just do the first couple of years just to check that it's working correctly, that I haven't not dollarized certain numbers and so on. And therefore, what's the equity value? The equity value is the enterprise value minus the debt.

And this is where the value comes from, isn't it? We pay off the debt, the debt shrinks, and gradually our equity value increases. There we are. Okay, so we're almost there. Copy this all the way to the right, and you can see that equity value growing very nicely, very strongly. So the final thing is, what about our returns to our investors? What about our returns to the PE firm? Well, how much did they put in? Let's go and find the equity that they put in at time zero. It's in our use sources of funds.

Keep on going, keep on going. It's in our sources of funds, that 1,188 there. I'm going to flip the sign.

I'm going to make it negative.

And the rationale for that is I want this to be an IRR.

So we put money into the business and we're hopefully going to get it out.

But we only exit the business in this year here, in year four. So I want an if statement that says, if it's year four, then bring down that equity value, otherwise make it zero.

So I'm going to say equals if, and my if statement is, if the year counter is equal to our exit year, and that's year four, way up in that set of assumptions up there. If the year counter is equal to year four, and I need to lock that with an F4, then bring down that equity value, otherwise zero.

Hit Return.

And I'll just copy this over and then put a formula there.

So then you can see, basically it's bringing down that equity value at the end of year four, but none of the other years.

And if I copy all of that off to the right, you can see again, just zero for all of those. And then I can finally do an IRR calculation. And so I do an IRR of all of those cash flows, hit Return, and I get 25.1%. Wow. So we're done. And that is an incredibly speedy LBO spreadsheet we've just done. It is worth just pausing at this point.

We've got a couple of minutes just before I sign off.

Basically, first of all, is that a good result? Well, we said right at the beginning, institutions would be looking for results of the sort of high teens, mid-20s, that sort of level before they'd be interested at all. This is 25%, so it looks pretty good.

Of course, it relies on things like those operational improvements.

It relies on us actually getting that better profit and the exit multiple of 8.1 times. That's part of it. But what's driving it? Well, there's a couple of things.

The first is basically that steady improvement in revenue and the fact that the business actually throws off a large proportion of its profits as cash, basically means that the enterprise value grows quite nicely here.

And you can see it goes from 2.8 in the first year to 3.7 out here. So about 7 or 800 million of extra euros. And similarly, same sort of number. I got 1.5 of debt in the first year, and that's basically fallen to 760. So same thing. We've got about 800 of value from paying off the debt. And those are roughly even in terms of contributors to that healthy IRR. So all looks pretty plausible.

"Why don't you take cash off your net debt?" Oh, really good question. I could have done that. I absolutely could have done that.

Actually, if you think about it, it won't make any difference, because my ending cash is zero until the very final year. So you're absolutely right. I should have done that.

I should have taken cash off to get the net debt, but it doesn't make any difference at the moment because basically I don't have any cash. But you're right.

If I did a seven-year IRR, then I should have done exactly that. Good spot, Dorothy. Good spot. Okay, we're done.

And it's just a minute or two before I have to close. So any final questions? If not, I will sign off and hope to see you on one of these sometime soon. Okay.

Okay, that's me done. Thanks very much then. Take care. Thanks a lot.