Model Exercise (2 Hours)

You are encouraged to get a shell working / balancing model first and then add each feature,
working capital, etc. so that in case you run out of time you will have a working model which will
yield the most points.

If you are uncertain about how to handle an exercise or part of the exercise, please make simplifying
assumptions and move on in order to complete as much of the exercise as possible. A working
model that balances and functions when assumptions are changed will be awarded the most points.
Manage your time carefully.

The Chicken Box (“Box”) is a regional chain of fried chicken restaurants in the United States, and is
currently owned by four entrepreneurs.

In 2011, Box had 100 restaurants with an average annual sales volume (AUV) of $1,500,000 per restaurant
and gross margin of 70%. Assume AUV stays constant throughout projection period (but be able to adjust
growth rate).

Box incurs the following operating expenses:

1. Annual rent expense of $75,000 per leased restaurant. All restaurants are leased.
2. Each of the four owners will continue to earn (1) $500,000 in salary plus (2) 0.5% of sales for
managing the business.
3. Other operating expenses of $70 million in 2011 and grows $650,000 per each new restaurant.

In 2011, the owners approached a private equity firm (the “Sponsor”) to sell Box. Sponsor has agreed to
purchase Box for a total purchase price of 5.5x 2011 EBITDA. Assume the transaction close is at the end of
2011 (i.e. first year of Sponsor ownership is 2012).

Proposed transaction structure is as follows:

• 1.0x Funded Senior Revolving Credit Facility (LIBOR + 400bps, ignore unused line fee), maturity in
2017.
• 2.0x Term Loan (LIBOR + 700 bps, 2% PIK interest), maturity in 2017.
o Amortization of $1 million each year.
o 100% excess cash flow sweep (any cash available after (1) maintaining minimum cash
balance and (2) paying down revolver)
• 0.5x Contingent Seller Note (no interest).
o Unearned if EBITDA is less than $35 million at exit and paid in full if EBITDA is greater
than $40 million at exit. Earned ratably between $35 million and $40 million in exit
EBITDA.
• 1.5x Sponsor Cash Equity (75% ownership).
• 0.5x Rollover Equity (25% ownership).
• Assume all cash on the balance sheet is swept by sellers at close (i.e. cash balance at close is $0) and Box
is purchased on a cash-free, debt-free basis.
• Assume LIBOR for 2012 is 1.00% and increases by 25bps per annum.
 • Financing fees of $3 million paid at close. Additional transaction fees and expenses of $2 million also
paid at close. All fees to be funded by additional draw on the revolver at close.

Exercises:

• Build a three statement model (IS, BS, CF) including linking together each of the items below and
including a correct revolver draw / pay-down for 2012 to 2016. The model should be built in
thousands of dollars.
• Build an annual operating forecast for Box assuming that number of restaurants increases by 6
restaurants each year (base case). You do not need to make a mid-year convention assumption. Use
2011 as the first year for the revenue forecast.
• Assume depreciation is 1% of revenue and there is no amortization.
• Assume tax rate is 40%.
• Use the attached excel file to fill in the entries to adjust the closing balance sheet at 12/31/11. The
balance sheet in the excel file is pre-transaction 12/31/11.
• Build a working capital schedule using A/R days, A/P days, Inventory days. Other current assets and
liabilities can be modeled as a % of revenue.
• Assume growth CapEx is $300,000 per new restaurant
• Assume maintenance CapEx is $10,000 per restaurant per year.
• Build a debt schedule based on the capital structure on the previous page. Assume minimum cash
balance of $2 million for 2012 - 2016. You should amortize financing fees.
• Calculate cash-on-cash return to Sponsor on a 12/31/2016 exit. Assume exit multiple of 7.0x. Cash-
on-cash Return is defined as Exit Cash Equity Value / Purchase Equity Value.
o Assume 10% fully-diluted management options exercisable at cost.
• Create cash-on-cash returns table showing returns sensitized for exit multiple (5.0x to 8.0x in 1.0x
increments) and AUV growing from 0% to 4% in 1% increments)
• Additional Items (only attempt once you have a fully functioning model that balances)
o Build in a switch that allows the new restaurant growth assumption to change to either 10
new restaurants each year (upside case) or 2 new restaurants each year (downside case)
o Show total leverage ratio and net leverage ratio at the end of each year of the forecast period
(2012 – 2016). Exclude Seller Note from this calculation.