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    Business Valuation

    Topics involving approaching valuation from a practical perspective
    Posts1

    Excel

    Incorporating excel techniques into accounting, business valuation and modelling.
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    Leveraged Finance

    Topics on leveraged finance and buyouts
    Posts2

    Merger Modelling

    Topics on modelling for M&A
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    Templates & Builders

    Play around with some of my ready-made builders
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    New Posts
    • Kenny
      Jun 26, 2021
      Acquiring a controlling stake in an associate company
      Merger Modelling
      The below spreadsheet illustrates how the resulting consolidated balance sheet of the acquirer looks like based on acquiring an additional interest in an existing associate company.
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    • Kenny
      Jun 20, 2021
      Fund distribution waterfall
      Templates & Builders
      Use this simple illustrative spreadsheet to determine how the distribution of proceeds upon winding up works for an investment fund. For simplicity, the distribution here is done as a " European waterfall " i.e. liquidation is done at the end of the fund life and not on a deal-by-deal basis.
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    • Kenny
      Jun 20, 2021
      De-complicating "LBO"
      Leveraged Finance
      Many people get caught up in the term LBO (Leveraged Buy Out) when it comes to modelling. ​Plain terms An LBO is nothing more than a buyout of a business that is heavily funded by debt, usually 65% or more. In contrast to traditional LBO deals in the US, the concept and structure of harnessing leverage in Asia are relatively simpler, sometimes involving a couple of debt tranches. ​ From a capital budgeting point of view, most buyers will seek to use debt funding as it is less costly than using (or raising) equity, but more importantly, financing an acquisition using more debt means that the amount of cash outlay can potentially be lower i.e. enhancing the returns to equity . Cash flows are critical. The choice and structure of debt funding used in an acquisition is largely predicated on the nature and quality of underlying cash flows. This is the most critical and fundamental aspect of all LBOs. Ultimately, the increase in equity value from a buyout comes down to essentially three factors : Growth Multiple expansion Deleveraging Consider this illustrative scenario: A company valued at 6.0x EBITDA at the point of acquisition based on a $100m EBITDA results in a deal value of $600m. Assuming the buyout was financed with 80% debt, the corresponding value of equity is $120m . Profitability growth Upon exit, let's assume that the EBITDA has grown by 20% to $120 and the company is valued higher at 7.0x, the resulting EV would be $840m . Because part of the acquisition debt has been repaid over the investment period, the net debt on exit has been reduced to 30% or $252m, giving an exit equity value of $588m . From the above, we can easily observe that we have increased the value of equity from $120m to $588m, which translates to a nearly 5-fold return. To break this down, let's first look at EBITDA. The value we've created here from improving the operating cash profits can be quantified as: Multiple expansion Secondly, in the process of driving the top and bottom-lines i.e. size and profitability, the financial sponsors have also changed the overall "risk profile" of the business, such as: expanding to new markets, developing proprietary technology in new products, institutionalizing sales processes and improving the overall quality of customers, etc. These enhancement initiatives make the business better , or what bankers commonly call: equity positioning  or equity re-rating . The idea behind this is to re - position the company more favourably amongst its competitors so as to justify a valuation multiple premium. In this case, we had assumed that on exit, the company will be valued at 7.0x EBITDA. The uplift in equity based on this can be calculated as: Deleveraging Lastly, it's the additional value created from financial engineering . This is nothing more than just the reduction in net debt of the company from entry to exit. The value created is simply the difference between the net debt amounts: Putting it all together, we have: We have therefore effectively quantified the three sources of value creation to be a total of $468m . Although deleveraging drives most the value here, collectively, both improvements to the EBITDA and re-rating of the business post investment is also significant. Feel free to play around with the parameters using the below spreadsheet:
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