Financial Transactions
A Complete Guide to Business Finance & Private Equity
Types of Financial Transactions
1.
Equity: Selling ownership in a company. Common for venture capital (VC). Example: Raising $5M for 20% equity equals $25M valuation.
2.
Debt: Borrowed capital paid back with interest over time. Suited for businesses with hard assets like real estate or equipment. Example: Buying a home with a mortgage.
3.
Mergers & Acquisitions (M&A): One company buys another to consolidate the market, expand product offerings, improve distribution, gain efficiency or eliminate competitors. Example: Facebook buying Instagram for $1B with only a 13-person team.
4.
Private Equity (PE) - Leveraged Buyout (LBO): Buy a company using debt, like a mortgage. Example: Put down $20M for 10% of company, use debt to buy the rest, grow profits to pay back debt, sell company for gain. Can fail like Toys R Us.
Financial Terms to Know
5.
EBITDA: Earnings before interest, taxes, depreciation, amortization. Net Income is bottom-line profit.
6.
Assets: Real estate, capital equipment, cash. Liabilities: Loans, accounts payable, leases. Shareholders' Equity equals Assets minus Liabilities.
7.
Equity Value: Shares times Share Price (Market Cap). Enterprise Value: Equity Value plus Debt plus Preferred Stock plus Non-controlling interest minus Cash.
8.
Multiples: Ratios versus peers like P/E or EV/EBITDA. Beta: Volatility versus S&P 500. CAPM: Expected return based on risk.
9.
WACC: Weighted average cost of capital. ROIC: Return on invested capital. Sharpe Ratio: Risk-adjusted return.
Private Equity Types
10.
Angel Investing: Individual investors with very high failure rate.
11.
Venture Capital (VC): Early stage pre-seed, seed, Series A/B with high risk, high growth. Investment range $500K-$5M.
12.
Growth Equity: $5-30M investments with minority positions, longer hold periods, lower upside.
13.
Small Buyouts/SMB PE: Buy $1M EBITDA businesses with proven demand. Examples include Peter Kang, Tiny, Brent Beshore, Hormozi. Investment range $5-50M.
14.
Large Buyouts: Firms like KKR, Blackstone handle $75-500M+ deals with 80% debt, 20% equity. Lower returns but higher stability.
15.
Public Equities: Amazon, Apple, etc. Most lifetime gains come from a few companies. Most stocks underperform or lose money.
Types of Debt
16.
Senior Debt: 4-10% cost, secured, first to be repaid like mortgages.
17.
High Yield Debt: 10-17% cost, riskier, often unsecured.
18.
Mezzanine Debt: 17-25% cost, subordinated, hybrid equity-debt.
19.
Equity: 100%+ cost, no repayment, highest risk. Debt selection depends on default probability, collateral like real estate or IP, and cash flow profile.
How PE Firms Create Returns
20.
Pay Down Debt: PE firms use company cash flow to reduce interest and increase equity.
21.
Increase EBITDA: Grow revenue, reduce costs, add-on acquisitions, expand margins.
22.
Multiple Expansion: De-risk business, improve management, operations, team depth, expand geography, product lines, or customer base.
23.
Macro Conditions: Cost of debt impacts return. When interest rates are low, more deals happen. High interest equals higher hurdle rate.
Return Metrics
24.
IRR: Internal Rate of Return. Example: $100 to $200 in 2 years equals 50% IRR.
25.
MOIC: Multiple of Invested Capital. Example: $100 in to $300 out equals 3x MOIC.
26.
Option Pool: 15% of profits go to management. Example: $308M times 15%.
PE Compensation Structure
27.
Management Fee: 2% annually. Example: $200M fund generates $4M fee per year.
28.
Carried Interest: Profit share after 8-10% return hurdle. Only earned if limited partners make minimum return first.
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