Insights

Incentive equity compensation helps align investors with the management team running the business. In every control private equity transaction, it is one of the most important variables to get right. This post will explain how equity compensation generally works with visuals that should help cement these concepts.

An unbalanced balance sheet in a three-statement financial model can be a nightmare if you don’t understand the mechanics that would otherwise result in a balanced balance sheet. In this post we will explore how the cash flow statement balances a three-statement model, and we will include common errors that result in a broken model together with instructions on how to fix them.

Adjusted EBITDA is a very common metric that can be found in many investor presentations, which makes understanding EBITDA and acceptable adjustments to this figure important. Unfortunately EBITDA is frequently used as a proxy for cash flow. As the video featured in this post will demonstrate, it is anything but. In businesses that require heavy capital expenditures or those with heavy debt burdens, the discrepancy between EBITDA and cash is vast. Add to this the adjustments investment bankers and management teams will use to embellish or even exaggerate earnings and the metric can become meaningless.

Per Michael Porter there are two ways to compete, by charging lower prices or by developing differentiated products and offerings. In this context product differentiation is the only way to avoid a race to the bottom.

In an LBO model the sources and uses table is a convenient way to track the sources and uses of cash required to close a transaction. Building a sources and uses table can appear to be a process that is without a proper sequence, but there is definitely an order that can be followed. To understand it, let’s first explore concise definitions of the two terms. Think of sources and uses as follows: