BEHIND THE NUMBERS
How this calculation works
Worked example
Entry value is £500,000 and equity is £200,000. Two £40,000 cash sweeps reduce debt to £220,000. Exit equity is £280,000: 1.4× the investment and an annualised return of 18.3216% over two years.
Example result: 18.3216%
Keep enterprise value separate from equity
The acquisition multiple produces an enterprise value. The sponsor contributes the amount not funded by debt, including entry fees, and receives exit proceeds only after remaining debt is deducted. Cash accumulated after debt repayment belongs in that bridge too.
Inspect the debt schedule before the IRR
A strong exit assumption can hide a cash shortfall during ownership. This model stops when operating cash cannot pay the annual interest bill. It does not assume that a lender extends more credit to cover the gap.
Assumptions and rounding
- One debt tranche, end-of-year cash sweeps and no interim distributions.
- Cash conversion is the user’s after-tax, after-capex operating estimate before financing interest. Internal values are not rounded to pennies between years.
Questions about this calculator
Does cash conversion calculate Corporation Tax?
No. Enter a cash conversion assumption that already reflects the relevant operating cash costs, tax, capex and working capital. The model does not calculate financing tax relief.
Is the annualised return an IRR?
With exactly one equity investment at entry and one receipt at exit, the annualised money multiple is the equity IRR. Interim distributions would require a different cash-flow calculation.