Let’s make some assumptions about the fees the target will pay to complete the LBO transaction. Typically, there is an advisory fee measured as a percentage of the transaction size, a financing fee associated with each tranche of debt calculated as a percentage of principal, and miscellaneous expenses of a fixed nature, such as legal and accounting fees. There may also be a fee paid to the sponsor.
For now, we will just set up our percentage and fixed-expense assumptions, since we do not yet have enough information about the capital structure to calculate financing and advisory fees in dollar amounts. However, there is one exception–the revolver–whose size we assumed in the previous step. Fees on the revolver are calculated as a percentage of the total committed amount, so we can calculate the revolver fee right away. We’ll revisit this section of the model later to compute the amortization of capitalized financing costs, which feeds into the pro forma P&L.
