CFM M&A Modeling & Deal Structuring Flashcards

In an LBO model, which metric do private equity sponsors primarily use to measure investment returns?

Answer: Internal Rate of Return (IRR) and Money-on-Money (MoM) multiple

PE sponsors evaluate LBO returns using IRR (time-weighted return) and MoM (total return multiple), targeting IRRs of 20%+ over a 3–7 year hold period.

What is the purpose of a 'sources and uses' table in an LBO or M&A model?

Answer: To show how the deal is financed (sources) and how the funds are applied (uses)

The sources and uses table ensures that total financing raised exactly equals total transaction costs, confirming the deal is fully funded.

In M&A deal structuring, what is a 'collar' agreement?

Answer: A mechanism that adjusts the exchange ratio if the acquirer's stock price moves outside a set range

A collar protects target shareholders in stock deals by adjusting the exchange ratio to keep deal value within a defined range if the acquirer's stock fluctuates.

When modeling an LBO, 'debt paydown' improves equity returns primarily by:

Answer: Reducing net debt at exit, which increases equity value for the same EV

As the LBO company pays down debt over the hold period, a greater share of enterprise value at exit flows to equity holders, boosting IRR and MoM.

What distinguishes a 'merger of equals' from a typical acquisition?

Answer: Both companies combine at roughly equal valuations with shared governance and no control premium

In a merger of equals, both companies have similar size and negotiate a combination where leadership, board seats, and ownership are shared rather than one party paying a premium for control.

In M&A modeling, how is goodwill calculated?

Answer: Purchase equity value minus the fair value of net identifiable assets acquired

Goodwill equals the equity purchase price less the fair value of identifiable net assets (assets minus liabilities) obtained in the acquisition.