Maximizing Growth Potential: Leveraging 2x Step-Up in ETA

In the realm of business acquisitions, harnessing the power of step-up in equity investment can be a game-changer, particularly when structured with a 2x multiplier and an 8% preferred rate.

Let's dive into a concrete example to illustrate this strategy's impact, considering a $1M EBITDA firm purchased at a 5x multiple, with a financing structure of 70% debt, 20% equity with step-up, and a 10% seller note. Then, we'll explore a payout scenario after 5 years, assuming the company doubles in size and exits at a multiple of 6x.

Payout Scenario After 5 Years:

Initial Investment:

Equity Investment: 30% of $5M purchase price = $1.5M

Debt Financing: 70% of $5M purchase price = $3.5M

Seller Note: 10% of $5M purchase price = $500K, with an 8% interest rate

Growth and Exit:

After 5 years, the company doubles in size, with EBITDA reaching $2M.

Exit valuation: $2M EBITDA x 6x multiple = $12M

Payout Calculation:

Debt Repayment:Original Debt: $3.5M

Interest at 11.5% over 5 years: Approximately $2.29M

Total Repayment: Approximately $5.79M

Seller Note Repayment:Original Note: $500K

Interest at 8% over 5 years: Approximately $200K

Total Repayment: Approximately $700K

Equity Payout with 2x Step-Up:Step-Up Value: $1.5M (original investment) x 2 = $3M

Remaining Equity Value after Step-Up: $12M - $5.79M (debt repayment) - $700K (seller note repayment with interest) - $3M (step-up value) = $2.51M

Preferred Return: $2.51M (remaining equity value after step-up) x 8% x 5 years = $1.004M

Remaining Equity Value after Preferred Return: $2.51M - $1.004M = $1.506M

Entrepreneur (New Owner) Payout:

Remaining Equity Value: $1.506M

After accounting for the 2x step-up and preferred return for equity investors, the new owner would receive a payout of $1.506M, reflecting their share of the remaining equity value after all repayments and preferred returns.

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