LBO Lab · Level 8: Rollover and the MIP

Time 0:00 / 12:00 targetHints 0Base 1400 pts

Case brief · Level 8 of 8

Quillon Signal Technologies

Industrial signalling software

Quillon is a fictional signalling-software business bought at 11x. Management rolls over 20% of the total equity cheque alongside the sponsor (pari passu) and receives a management incentive pool of 10% of the equity GAIN at exit, which dilutes the sponsor.

Debt is 3.5x senior and 1.5x sub with 4% cash and 8% PIK interest; 75% of excess cash sweeps to the senior loan.

LTM revenue / EBITDA: $320m / $89.6m (28.0%)
Growth / margin step: 8.0% p.a. / +50 bps p.a.
Capex / D&A, % rev.: 3.0% / 3.5%
Tax rate: 25%
Entry / exit multiple: 11.0x / 11.0x
Senior debt: 3.5x at 8.5%, 1% amort.
Sub / mezzanine: 1.5x at 4.0% cash + 8.0% PIK
Cash sweep: 75%
Senior interest on: opening balance
Mgmt rollover / MIP: 20% of equity / 10% of gain

What exit multiple delivers a 20% SPONSOR IRR after the rollover and the MIP?

Tolerance +/-0.1x

	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)	985.6
5	Transaction fees	19.7
6	Minimum cash funded	10.0
7	Total uses	1,015.3
8	Senior debt	313.6
9	Sub / mezzanine debt	134.4
10	Total equity (balancing figure)	567.3
11	Total sources	1,015.3
12	Total debt / LTM EBITDA at close	5.00x
13
14	Exit at end of Year 5
15	Year 5 EBITDA	143.4
16	Exit enterprise value	1,577.5
17	less: net debt at exit	188.3
18	Exit equity value	1,389.2
19	less: management incentive pool (% of gain)	82.2
20	Equity value to shareholders after MIP	1,307.0
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)	453.8
25	Management rollover equity	113.5
26	Sponsor exit proceeds	1,045.6
27	Sponsor cash flows	(453.8)	0.0	0.0	0.0	0.0	1,045.6
28	Sponsor IRR	18.2%
29	Sponsor MOIC	2.30x
30	Total equity MOIC (before MIP)	2.45x
31	Total equity IRR (before MIP)	19.6%
32
33	Covenant summary (Years 1-5)
34	Peak net debt / EBITDA	4.12x
35	Lowest EBITDA / cash interest	3.07x
36	Covenant status	PASS
37
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