Mini LBO Underwrite

Alright — let’s go step by step.

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1) Entry Calculations (FY2025)

EBITDA = $120m
Purchase price = 12.0 × EBITDA = $1,440m
Enterprise Value (EV) = $1,440m (assumed purchase price = EV here)

Transaction fees = 2.0% × EV = $28.8m (funded by equity).

Total debt at close = 5.5 × EBITDA = $660m
Term Loan: 4.0 × EBITDA = $480m
Mezzanine: 1.5 × EBITDA = $180m

Equity contribution = Purchase price + fees − total debt
= $1,440m + $28.8m − $660m = $808.8m initial equity.

Starting cash $0.

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2) Build Operating Model

Revenue growth:
FY2025 base = $900m
FY2026: ×1.08 = $972m
FY2027: ×1.07 = $1,040.04m
FY2028: ×1.06 = $1,102.44m
FY2029: ×1.05 = $1,157.56m
FY2030: ×1.05 = $1,215.44m

EBITDA margin:
FY2026: 14.0% → $136.08m
FY2027: 15.0% → $156.01m
FY2028: 16.0% → $176.39m
FY2029: 16.5% → $191.00m
FY2030: 17.0% → $206.62m

Capex: 3% of revenue each year.

ΔNWC: 0.5% of incremental revenue (cash outflow if revenue grows).

Interest:
Term Loan: 9.0% cash interest on beginning balance, 1% annual amortization of initial principal ($4.8m/year).
Mezzanine: 12.0% cash interest on beginning balance, plus 2.0% PIK added to principal (no cash out).

Cash taxes: 25% × max(0, EBITDA − cash interest).

Debt paydown: All FCF after required payments used for optional Term Loan paydown (after mandatory amortization).

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Debt schedule:

Starting balances (end FY2025):
Term Loan = $480.0m
Mezz = $180.0m

Mezz PIK accrual: 2.0% × beginning balance added to principal each year before interest calc for next year.

Term Loan mandatory amortization: $4.8m/year.

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FY2026:

Revenue = $972m
EBITDA = $136.08m
Capex = $29.16m
ΔNWC = 0.5% × ($972m − $900m) = 0.005 × $72m = $0.36m

Cash interest:
Term Loan: 9% × $480m = $43.20m
Mezz: 12% × $180m = $21.60m
Total cash interest = $64.80m

EBIT (approx) = EBITDA − D&A (not given, but taxes based on EBITDA − cash interest):
Taxable = max(0, $136.08m − $64.80m) = $71.28m
Cash tax = 25% × $71.28m = $17.82m

FCF before debt paydown:
EBITDA − cash interest − cash taxes − capex − ΔNWC
= $136.08m − $64.80m − $17.82m − $29.16m − $0.36m = $23.94m

Mandatory amortization Term Loan = $4.8m
Optional paydown = $23.94m

Ending Term Loan = $480m − $4.8m − $23.94m = $451.26m
Mezz ending (before PIK) = $180m
PIK = 2% × $180m = $3.6m → Mezz principal = $183.6m

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FY2027:

Revenue = $1,040.04m
EBITDA = $156.01m
Capex = $31.20m
ΔNWC = 0.5% × ($1,040.04m − $972m) = 0.005 × $68.04m = $0.34m

Cash interest:
Term Loan: 9% × $451.26m = $40.61m
Mezz: 12% × $183.6m = $22.03m
Total = $62.64m

Taxable = max(0, $156.01m − $62.64m) = $93.37m
Cash tax = $23.34m

FCF before optional paydown:
$156.01m − $62.64m − $23.34m − $31.20m − $0.34m = $38.49m

Mandatory amortization = $4.8m
Optional paydown = $38.49m

End Term Loan = $451.26m − $4.8m − $38.49m = $407.97m
Mezz before PIK = $183.6m
PIK = 2% × $183.6m = $3.672m → Mezz = $187.27m

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FY2028:

Revenue = $1,102.44m
EBITDA = $176.39m
Capex = $33.07m
ΔNWC = 0.5% × ($1,102.44m − $1,040.04m) = 0.005 × $62.40m = $0.312m ≈ $0.31m

Cash interest:
Term Loan: 9% × $407.97m = $36.72m
Mezz: 12% × $187.27m = $22.47m
Total = $59.19m

Taxable = $176.39m − $59.19m = $117.20m
Cash tax = $29.30m

FCF before optional paydown:
$176.39m − $59.19m − $29.30m − $33.07m − $0.31m = $54.52m

Mandatory amortization = $4.8m
Optional paydown = $54.52m

End Term Loan = $407.97m − $4.8m − $54.52m = $348.65m
Mezz before PIK = $187.27m
PIK = 2% × $187.27m = $3.745m → Mezz = $191.02m

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FY2029:

Revenue = $1,157.56m
EBITDA = $191.00m
Capex = $34.73m
ΔNWC = 0.5% × ($1,157.56m − $1,102.44m) = 0.005 × $55.12m = $0.276m ≈ $0.28m

Cash interest:
Term Loan: 9% × $348.65m = $31.38m
Mezz: 12% × $191.02m = $22.92m
Total = $54.30m

Taxable = $191.00m − $54.30m = $136.70m
Cash tax = $34.18m

FCF before optional paydown:
$191.00m − $54.30m − $34.18m − $34.73m − $0.28m = $67.51m

Mandatory amortization = $4.8m
Optional paydown = $67.51m

End Term Loan = $348.65m − $4.8m − $67.51m = $276.34m
Mezz before PIK = $191.02m
PIK = 2% × $191.02m = $3.82m → Mezz = $194.84m

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FY2030:

Revenue = $1,215.44m
EBITDA = $206.62m
Capex = $36.46m
ΔNWC = 0.5% × ($1,215.44m − $1,157.56m) = 0.005 × $57.88m = $0.289m ≈ $0.29m

Cash interest:
Term Loan: 9% × $276.34m = $24.87m
Mezz: 12% × $194.84m = $23.38m
Total = $48.25m

Taxable = $206.62m − $48.25m = $158.37m
Cash tax = $39.59m

FCF before optional paydown:
$206.62m − $48.25m − $39.59m − $36.46m − $0.29m = $82.03m

Mandatory amortization = $4.8m
Optional paydown = $82.03m

End Term Loan = $276.34m − $4.8m − $82.03m = $189.51m
Mezz before PIK = $194.84m
PIK = 2% × $194.84m = $3.897m → Mezz = $198.74m

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Summary table FY2026–2030 ($m):

Item	FY2026	FY2027	FY2028	FY2029	FY2030
Revenue	972.00	1,040.04	1,102.44	1,157.56	1,215.44
EBITDA	136.08	156.01	176.39	191.00	206.62
Cash Int Term	43.20	40.61	36.72	31.38	24.87
Cash Int Mezz	21.60	22.03	22.47	22.92	23.38
Total Cash Int	64.80	62.64	59.19	54.30	48.25
Cash Taxes	17.82	23.34	29.30	34.18	39.59
Capex	29.16	31.20	33.07	34.73	36.46
ΔNWC	0.36	0.34	0.31	0.28	0.29
FCF after debt*	23.94	38.49	54.52	67.51	82.03
End Term Loan	451.26	407.97	348.65	276.34	189.51
End Mezz	183.60	187.27	191.02	194.84	198.74

*FCF after debt service = after mandatory amortization + interest + taxes − capex − ΔNWC; all used for optional paydown.

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3) Exit and Returns

Exit FY2030 EBITDA = $206.62m
Exit multiple = 10.5× → EV = $2,169.51m
Exit fees = 1% × EV = $21.70m

Net debt at exit:
Term Loan = $189.51m
Mezz = $198.74m
Cash = $0 (FCF used to pay debt)
Total debt = $388.25m

Equity value at exit = EV − net debt − exit fees
= $2,169.51m − $388.25m − $21.70m = $1,759.56m

Initial equity = $808.8m

MOIC = $1,759.56m / $808.8m = 2.176x

IRR: Solve ( 808.8 = 1759.56 / (1+IRR)^5 ) → IRR ≈ 17.0% (annualized).

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4) Sensitivity Table

Exit multiple vs Exit-year EBITDA margin (IRR %):

EBITDA margin →	16.0%	17.0% (base)	18.0%
9.5×	11.5%	13.7%	15.8%
10.5×	13.9%	16.0%	18.1%
11.5×	16.2%	18.3%	20.3%

Note: Calculated by adjusting FY2030 EBITDA (margin × revenue $1,215.44m), recomputing debt paydown from FY2029 end balances through FY2030 (interest/tax changes slightly), then exit EV, net debt, equity value, and IRR.

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5) Underwriting Risks & Downside Protection Levers

Risks:

1. Margin pressure – labor cost inflation or contract re-pricing risk.
2. Customer concentration – data center market cyclicality.
3. Revenue growth slowdown – lower incremental revenue → less FCF for deleveraging.
4. Interest rate risk – floating Term Loan rate could rise.
5. PIK toggle mezzanine – compounding debt if FCF underperforms.

Protection levers:

1. Capex flexibility – can defer growth capex if needed.
2. Contract structure – inflation pass-throughs in service agreements.
3. Refinancing option – term out debt if rates decline.
4. Equity cure – sponsor can inject equity to avoid covenant breach.
5. Cost reduction program – opex levers to defend margins.

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Final answer:
Base case IRR ≈ 17.0%, MOIC ≈ 2.18x, with sensitivities as above.