LBO Lab · Level 2: What a cash sweep is worth

Time 0:00 / 7:00 targetHints 0Base 700 pts

Case brief · Level 2 of 8

Brightwell Dental Supplies

Distribution to dental practices

Brightwell is a fictional distributor with sticky customers and good cash conversion. The term loan has a 1% mandatory amortisation and 75% of excess cash is swept to prepay it.

Lenders ask how much of the sponsor return comes from forced deleveraging rather than growth.

LTM revenue / EBITDA: $300m / $75.0m (25.0%)
Growth / margin step: 6.0% p.a. / +50 bps p.a.
Capex / D&A, % rev.: 3.0% / 3.5%
Tax rate: 25%
Entry / exit multiple: 9.0x / 9.0x
Senior debt: 4.5x at 8.5%, 1% amort.
Cash sweep: 75%
Senior interest on: opening balance

By how many percentage points does the 75% sweep lift the sponsor IRR compared with no sweep (0%)? Enter the difference in points, e.g. 0.8.

Tolerance +/-0.1pts

	A	B	C	D	E	F	G
1	Sources & uses, exit and returns ($m)
2
3	Sources & uses at close
4	Enterprise value (entry multiple x LTM EBITDA)	675.0
5	Transaction fees	13.5
6	Minimum cash funded	10.0
7	Total uses	698.5
8	Senior debt	337.5
9	Sub / mezzanine debt	0.0
10	Total equity (balancing figure)	361.0
11	Total sources	698.5
12	Total debt / LTM EBITDA at close	4.50x
13
14	Exit at end of Year 5
15	Year 5 EBITDA	110.4
16	Exit enterprise value	993.6
17	less: net debt at exit	105.4
18	Exit equity value	888.2
19	less: management incentive pool (% of gain)	0.0
20	Equity value to shareholders after MIP	888.2
21
22	Sponsor returns
23	Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
24	Sponsor equity invested (after management rollover)	361.0
25	Management rollover equity	0.0
26	Sponsor exit proceeds	888.2
27	Sponsor cash flows	(361.0)	0.0	0.0	0.0	0.0	888.2
28	Sponsor IRR	19.7%
29	Sponsor MOIC	2.46x
30	Total equity MOIC (before MIP)	2.46x
31	Total equity IRR (before MIP)	19.7%
32
33	Covenant summary (Years 1-5)
34	Peak net debt / EBITDA	3.66x
35	Lowest EBITDA / cash interest	2.83x
36	Covenant status	PASS
37
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