MARK Partners is considering buying a service-oriented business at the end of 2019. Selected income statement and balance sheet items are provided below. MARK Partners expects revenue to grow annually at 20%. We assume that SG&A, AR, Inventory, CAPEX and Current Liabilities stay the same in dollar terms.

Assume a tax rate of 33% and transaction fees of $1mm. Since this is a service-oriented business, D&A (Depreciation and Amortization) is not included when computing gross profit.

They have negotiated an LOI to buy the business at 7x times EBITDA and in a worst case scenario expect to sell the business eventually at 5.5x. In addition they have lined up financing. Selected transaction capital sources are provided below. MARK Partners intends to use the maximum leverage available. A cash sweep is used to pay off debt. The acquisition and disposition of the business is structured a cash-free / debt-free transaction.

NOTES: (i) if you need to make assumptions, please state them and proceed, (ii) to answer the questions below we think it is helpful to create an income statement and cash flow statement of the business (and potentially a balance sheet), (iii) we assume that the seller delivers a cash-free balance sheet and that the existing debt is paid off by the seller.

Selected Income Statement Items

Item	2019 Close (dollar amounts in millions)
Revenues	$50
Gross Profit Margin	20%
Annual SG&A	$4
- Salaries	$2.4
- Rent	$0.2
- Other Expenses	$1.4

Selected Balance Sheet Statement Items

Item	2019 Close (dollar amounts in millions)
Existing Debt
- Type	Revolving Credit Facility
- Amount	$10
- Annual Interest Rate	10%
Current Liabilities	$0
Cash	$2
Accounts Receivable	$20
Inventory	$10
Annual CAPEX	$2
PP&E	$10
Depreciation
- Schedule	linear
- Period	5 years
Shareholder’s Equity + Retained Earnings	$10

Selected Transaction Capital Sources

Item	2019 Close (dollar amounts in millions)
Term Loan
- Amount	$2
- Annual Interest Rate	10%
- Term	1 year
- Amortization Schedule	straight line
Revolving Line of Credit
- Advance Rate on Receivables	80%
- Advance Rate on Inventory	50%
- Advance Rate on Fixed Assets	70%
- Annual Interest Rate	10%
- Amortization	None
Sub-Debt
- Amount (EBITDA Multiple)	1x
- Annual Cash Interest Rate	0%
- Annual PIK Interest Rate	20%
- Amortization	balloon payment
Seller Note
- Amount	$2
- Term	1 year
- Annual Interest Rate	0%
- Amortization Schedule	straight line

Questions

1. (*) What is the total purchase price of the business?
2. (*) What is the debt to equity ratio at the time of purchase and exit?
3. (*) What is the total interest requirement in 2020?
4. (*) Assuming a sale on 1/1/2021, what is the worst case scenario IRR?

Answer rating: 100% (QA)

ANSWER A Total Purchase Price means the aggregate amount the purchaser is obligated to pay for merchandise or services pursuant to the purchase agreement excluding any taxes administrative charges or ... View the full answer