Uncommon Brian Carlson Would Need

Uncommon

Brian Carlson would need to provide $10 million in seller financing. This comes from $45 purchase price less $5 million cash/equity from the management team, $20 million subordinated note from the LBO group, and $10 million in senior secured note from the merchant bank. The warrant is not included as at this point it has not been exercised. Since the warrant exercise is optional, those funds cannot be assured, and therefore are not included in this calculation.

There are $45 million in LBO proceeds, less debt. The debt at this point is $10 million. Payables will also need to be covered, at $7.25 million. Transaction costs are ignored for this discussion, as they are not mentioned in the case. This leaves $27.75 million remaining for the shareholders.

The cap table prior to the LBO is as follows:

Share

Owner

Paid

20%

First Coast (Series B)

$3.00 million

43%

Golden Eagle (Series A)

$7.00 million

30%

Brian Carlson

$200,000

7%

Management

Thus, the dollar breakdown will be as follows:

Owner

Share

Formula

Cash Paid

First Coast

20%

(.2)(27.75)

$5.55 million

Golden Eagle

43%

(.43)(27.75)

$11.9325 million

B. Carlson

30%

(.3)(27.75)

$8.325 million

Management

7%

(.07)(27.75)

$1.9425 million

C. Brian is slated to receive $8.325 million from the transaction. The note he is taking back is for $10 million. Given this, Brian will not receive cash.

D. To calculate Brian's rate of return, the value of the cash flows from the deal would need to be known. This can then be examined using the IRR function. If Brian receives payment on his note, he will receive the following:

10,000,000

10%

4

Year

1

2

3

4

Interest

1,000,000

784,529

547,511

286,792

Principle

2,154,708

2,370,179

2,607,197

2,867,916

Remaining

7,845,292

5,475,113

2,867,916

Total pmt

3154708

3,154,708

3,154,708

3,154,708

Sum pmt

12618832

Thus, Brian will receive $12,618,832 over the life of the deal, including interest. The IRR of these flows is 19%, given he is only putting up the $8.325 million from his equity holding.

E. For their investment, the Series A investors will receive a total of $11.9325 million, for a $7 million investment on 1/1/04. The Series B. investors will receive a total of $5.55 million for their investment of $3 million on 1/1/08. The spreadsheet to calculate the XIRR of these owners is as follows:

XIRR

1/1/2004

1/1/2008

12/31/2009

Class A

9.29%

-7,000,000

0

11,932,500

Class B

36.01%

0

-3,000,000

5,550,000

The Class B shareholders have a higher IRR because they were able to buy in at a relatively low price, and cash out quickly. The Class A shareholders needed to wait longer to cash out, which accounts for the lower IRR.

F. Under this scenario, the management team would receive the full $60 million, which gives them an IRR of:

XIRR

12/31/2009

12/31/2014

64.33%

(5,000,000)

60,000,000