MBO equity calculator
This calculator is designed to give you a broad indication of the equity share you might expect in an MBO or MBI that is financed in part by a venture capitalist. Remember this calculator is just a guide and not designed to replace your financial advisor. What it should do is help you begin to understand the very basics of how a private equity deal works for both the management team and the private equity investor.
There is no substitution for face-to-face advice and Clearwater can accept no responsibility for the results of any decisions you take as a result of using this model. If you wish to discuss any deal-related issues, please contact us.
Notes on entering data
1. Price: Prices quoted for businesses are usually debt-free / cash-free. The Clearwater valuation model will help you calculate the value of your business
2. Deal fees: 5 - 10% is normal - the bigger the deal, the lower the %
3. Tax rate: 20 - 30% dependent upon the level of taxable profits (after interest costs) - using 30% is prudent
4. Gearing: Debt finance for the deal as a % of total finance for the deal - the norm is 60% though it can vary
5. IRR: Short for "internal rate of return" - 30% annual return on money invested is a common target of venture capitalists - note that this does not mean payments of 30% pa in interest - this target rate of return is mainly generated from a later exit
6. PE Ratio: Taxed profit multiples of 6-10 are common for deals with profitable private companies, varying for different reasons
7. Opening working capital: The level of (net) working assets in the business is important as future growth will need to be funded. The model will assume that a 15% growth in profits will need a 15% growth in these working assets (stock + debtors - creditors)
8. Debt term: Varies from deal to deal and is usually structured to match the cashflows of the business. Five years is not unusual
9. Capital expenditure and depreciation: Enter the amounts you need to spend on capex, bearing in mind most businesses need to reinvest to at least the levels of depreciation to fuel growth
10. Turnover and operating profit: These are critical assumptions to tell you likely equity you might expect on a VC deal. If the business is flat and you are paying a reasonably full price, you will find that the equity for you is nil. In other words, it is probably not a deal for a venture capitalist!