Question

How much equity should we negotiate for a $20m investment if we expect to wait 5 years for an exit that will be priced at 7 times EBITDA for a company that has a 25% chance of generating 100M in EBITDA (otherwise it will be worthless) if investors require a 15% return? Assume that our current equity stake will be diluted in half by the time an exit occurs

Answer 1

Solution:

Investment	20,000,000
Expected Return	15%
Period	5 Years
Expectation after 5 year	40,227,144
(20 million 5 years @ 15% return)
=20,000,000*(1.15)^5

Chances	Probability	EBITDA	Exit factor	Value (EBITDA*Factor)	Applying probability (Value * Probability)
Given chances	25%	100 Million	7 times	700 Millions	175 Million
Remaining (100% - 25%)	75%	Zero	7 times	Zero	Zero
Total	100%				175 Millions

For getting 40,227,144 we need double stake in 175 Millions as 50% stake will be diluted

= 2 times of 40,227,144 / 175,000,000 = 45.97% stake

We will negotiate at least 45.97% stake for getting 15% return on 20 Million Investment