Your management team identifies LipLife as a business to acquire. LipLife owns the technology for a new lipstick that lasts five days and changes hues each night. The firm's founders are out of money and want to sell their lipstick algorithm and the technologies it is based on. Because you and your team don't have enough money to acquire the firm outright on your own, you turn to outside sources of funding. A venture bank is willing to put up a $5 million, six-year loan at 13% per year, which only has interest payments due during its life; the principal balance will be paid off at the liquidity event. Your team puts up $2 million of its own capital. One of your friends from the MBA program is a venture capitalist. His firm agrees to invest $2 million at an expected 40% annual return for six years, at which time it expects a liquidity event in order to obtain its money and return back. Include all your calculations to support each answer in order to earn full credit. Answers must be completed in sequence.
Required:
(a) Assume that in six years, LipLife will have an expected exit enterprise value of $27 million, based on an expected exit EBITDA of $2.25 million. What does this indicate the firm's expected exit EBITDA multiple will be?
(b) Given the future value calculated in (a), what will be the equity value at that time?
(c) Because the VC firm expects a 40% compound return on its investment, what would be the dollar value of its portion of the equity value you calculated in (b)?
(d) Based on your answer in (c), what would be the amount of the equity up front that you would have to give up in order to obtain LipLife's original venture capital investment?
(e) What will be the dollar value of the management team's original $2 million equity investment at the time of the liquidity event?