LBO Model Exercise

You are encouraged to get a shell working / balancing model first and then add each feature, working capital, etc. so that in case you run out of time you will have a working model which will yield the most points.

If you are uncertain about how to handle an exercise or part of the exercise, please make simplifying assumptions and move on in order to complete as much of the exercise as possible. A working model that balances and functions when assumptions are changed will be awarded the most points. Manage your time carefully.

Kibble Kraze is a leading manufacturer of private label dry dog and cat food in the United States and is currently owned by 4 entrepreneurs.

In 2019, Kibble Kraze produced 167,000 tons of pet food at an average sales price of $550 / ton and gross margin of 30% Assume an average selling price stays constant through the projection period (but be able to adjust the growth rate).

Kibble Kraze operating expenses (not including depreciation and amortization) in 2019 were 15,600,000 in 2019. Assume these grow at 4% a year.

Kibble Kraze has the following debt on the balance sheet:

  • $5 million Senior Revolving Credit Facility (LIBOR +400bps, ignore unused line fee), maturity in 2024.
  • 5x Term Loan (LIBOR +500bps, 2% PIK interest), maturity in 2025
    • Amortization of 5% original principal amount each year
    • 100% excess cash flow sweep (any cash available after (1) maintaining cash balance and (2) paying down revolver)
  • 0x Subordinated Note (LIBOR + 1050 bps, 2% PIK), maturity in 2025.
    • 100% excess cash flow sweep (any cash available after (1) maintaining cash balance and (2) paying down revolver and (3) paying down term loan)
  • Assume LIBOR for 2020 is 1% and increases by 25bps per annum

Exercises:

  • Build a three statement LBO model (IS, BS, CF) including linking together each of the items below including a correct revolver draw / pay-down for 2020 to 2024. The model should be built in thousands of dollars.
  • Build an annual operating forecast for Kibble Kraze assuming the number of tons increases by 3% each year and the price per ton increases at 2% a year. You do not need to make a mid-year convention assumption. Use 2019 as the first year for the revenue forecast.
  • Assume depreciation of 1% of revenue and there is no amortization.
  • Assume tax rate of 40%
  • Build a working capital schedule using A/R days, A/P days, Inventory days. Other current assets and liabilities can be modeled as a % of revenue.
  • Assume growth CapEx of $1,250,000 per year
  • Assume maintenance CapEX of $1,250,000 per year
  • Sources and Uses: Show the different components of the transaction and run a pro-forma balance sheet and show transaction accounting adjustments.
  • Build a debt schedule based on the capital structure on the previous page. Assume minimum cash balance of $2 million for 2020-2024
  • Build exit scenario and sensitivity analysis, make your own assumptions about what exit will look like and what sensitivity analysis to run.
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