Mosaic Deals Analytics™: Unlocking Insights Trapped in Spreadsheets
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LBO Exit and Returns Schedule
The purpose of the exit and returns schedule is to calculate the investment returns reflected in two key metrics: the internal rate of return ("IRR") and the Multiple of Invested Capital ("MOIC").
LBO Tax Schedule
The purpose of the Tax Schedule is to calculate: (a) cash taxes on a levered an unlevered basis for use in the free cash flows schedule, (b) deductible interest, (c) interest carryforwards, and (d) net operating losses.
LBO Debt Schedules
The purpose of the Debt Schedules is to (a) track the balances of each tranche of debt used in the LBO and the running cash balance, (b) calculate (net) cash interest expense, (c) calculate financing fees amortization associated with each tranche of debt.
The Free Cash Flow Schedule
The Free Cash Flows Schedule is responsible for the calculation of unlevered and levered free cash flows. The calculation and presentation of unlevered free cash flows for levered investments provides helpful context to understand the cash generating power of a business absent financial leverage and help the analyst isolate the impact of debt on overall returns. The levered free cash flows are ultimately the true cash generated by a levered business and are inputs into the debt and tax schedules.
The Sources and Uses Schedule
The Sources & Uses table is a comprehensive list and summation of: (a) all items being purchased in a transaction (the “Uses”) and (b) each capital source used to fund the transaction (the “Sources”) Total Sources must always equal Total Uses (i.e., you must arrange a source of funding for each dollar required to close a deal).
The Mechanics of the Mosaic LBO
Transaction models are comprised of six core calculation schedules spanning three distinct stages of a deal: (1) the transaction entry / or set up, (2) the investment hold period, and (3) the exit & returns. This article is a technical resource for Mosaic users interested in understanding the purpose of each schedule and how they are connected to one another.
How to Build an Operating Model (Forecast)
The Operating Model is a summary of the key forecast data comprising unlevered free cash flow. Operating models can get extremely complicated as analysts look to deeply understand the business models of the companies they conduct diligence on. It is not uncommon to see several-hundred-line revenue and expense builds supporting final-bid models. Regardless, all models for standard operating businesses (i.e., non “Balance Sheet” business models) consolidate to four lines: Revenue, EBITDA, Capital Expenditures ("Capex") and Changes in Net Working Capital which are the only ones necessary to run transaction returns analysis on a new investment opportunities.