Project Nettlebed — Sponsor-to-Sponsor Secondary Buyout
A 1.5-hour Secondary Buyout / Ability-to-Pay case study with a complete model answer
Modeled After
Jefferies
Special committee fairness materials that value a structural claim separately from the operating business and reconcile line-by-line against the prior book, with two qualitative pages defending the peer set before any multiple is applied
Structure and exhibit set are modeled after Jefferies. The company, the financials and every figure in this case are entirely our own.
The Situation
Nettlebed Facility Services, Inc. provides outsourced facility services to healthcare systems, life-sciences campuses and corporate real estate across the United States.
Nettlebed Facility Services
- Sector
- Outsourced facility services — janitorial and environmental services including regulated critical-environment cleaning, mechanical services under multi-year HVAC, plumbing and building-automation contracts, and grounds and exterior — sold to healthcare systems, life-sciences campuses and corporate real estate
- Size
- Geography
- United States; headquartered in Wauwatosa, Wisconsin, with a national branch network serving healthcare, life-sciences and corporate real estate customers
- Ownership
- Situation
The Prompt
You are an analyst at Thornmere Capital, a mid-market financial sponsor invited into the second round of the Culverhouse Partners auction of Nettlebed Facility Services, Inc. The investment committee meets before final bids are due and wants a recommendation, not a valuation.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 90 minutes.
PART 1
Historicals and earnings quality
PART 2
The first owner's return, and where it came from
PART 3
The margin bridge — what repeats and what does not
PART 4
The residual thesis and the two forward cases
PART 5
Add-on program, sources and uses, and the debt schedule
PART 6
Ability to pay, sensitivities and returns attribution
PART 7
Market evidence, the buyer universe and the deck
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Start with the seller's return, not with your own
- 02
Split the margin improvement before you forecast anything
- 03
Charge the cost of each lever before you count its benefit
- 04
Recognize that the staple makes the solve closed form
- 05
Screen the extract, and test whether the screen changed anything
- 06
Answer the committee's question, and be willing to lose
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
The secondary buyout problem
A sponsor-to-sponsor sale is not a first-time buyout of a neglected asset, and treating it like one is the fastest way to get the case wrong. The seller has already professionalized the business, taken the cost out, consolidated procurement and bought the accretive add-ons. What is left for the second owner is by definition what the first owner did not get to — either because it was harder, because it costs money before it makes any, or because a fund in year four of a five-year hold had no reason to start it. Identifying which of those three applies to each remaining lever is the analytical content of the case.
Multiple expansion is not an operating achievement
When a sponsor buys at one multiple and sells at a higher one, part of its return came from the re-rating rather than from anything it did — and the buyer paying the higher multiple is the party funding that part. Attributing the seller's gain across organic growth, add-on arbitrage, deleveraging and the change in multiple is what separates a business that improved from a business that got re-priced. It also sets the standard for your own underwriting: if your return depends on selling at a multiple above what you paid, you are making the same bet the seller just won, into a market that has already re-rated once.
Repeatable versus done-once margin
Margin improvement decomposes into work that changes the cost base permanently and work that recurs. Re-routing a fixed book of contracts, consolidating suppliers, centralizing branch back offices and shifting mix toward a higher-margin service line are all step changes: each can be done well, and each can only be done once. Price realization is different — it is an account-management discipline that keeps producing as long as it is enforced. A bridge that reports only the total tells a buyer that the business improved. A bridge that reports the split tells the buyer what it is actually buying.
Ability to pay when the debt does not flex
In a staple-financed auction the leverage is committed in turns of LTM Adjusted EBITDA before any bidder names a price, so the debt quantum, the interest, the amortization, the sweep and the net debt at exit are all independent of the purchase price. Only the sponsor's equity check moves. That turns what looks like a circular problem into a substitution: net proceeds at exit have to equal the equity check compounded at the required return, which pins the check, which pins enterprise value once fees and minimum cash are added back. No goal seek, no iterative calculation.
The seller's information advantage
Every forward figure in a sale memorandum is one the seller chose to publish, and in a secondary buyout the seller is a professional investor who has owned the asset for five years. It ran the price program it is now selling as an opportunity. It screened the add-on pipeline and bought the best names out of it, so what remains is the residue of that screen and prices accordingly. It commissioned the vendor due diligence the buyer is reading. And the data room closes before final bids. None of that makes the plan wrong; it makes underwriting the plan a decision to accept the seller's forecast on the seller's evidence, and that decision belongs on the page.
Rollover as a negotiating variable, and as a statistical trap
A selling sponsor that rolls part of its proceeds is signaling belief in the plan, and buyers pay something for that signal. In most transaction sets the deals with a rollover are also the smaller ones, so a straight cross-tabulation of multiple against rollover attributes a size effect to the rollover and overstates it. Holding the comparison inside a deal-size bucket is the fix, and the difference between the two answers is the number you should be willing to concede — not the flattering one.
Add-on arbitrage after the pipeline has been picked over
Buying small businesses below the platform's own multiple creates value mechanically, which is why it is the one lever a first sponsor rarely leaves unpulled. That is exactly why the second owner should expect it to price worse. A pipeline that has already been screened by a well-resourced owner, with the six best names removed, is not the same market at a different date — it is the remainder. Underwriting the seller's historical entry multiple on the businesses that are left is the single most common way this case is overpaid.
Earnings quality when one add-back is forward-looking
Every multiple in this case divides into one denominator, so the composition of that denominator decides the price. A management fee that disappears at close and integration costs on completed acquisitions are ordinary. A run-rate benefit that annualizes three months of realized price increases is a forecast sitting inside a historical figure rather than a cost added back. It may well be legitimate, but it has to be identified, because the residual price program has to be measured net of it or the same dollar gets underwritten twice, once by the seller and once by you.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Second-owner value creation thesis
- —Residual value after the first sponsor
- —Ability-to-pay under a compressed multiple
- —Add-on acquisition capacity
- —Roll-over equity structuring
- —Sponsor buyer universe
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Nettlebed — Sponsor-to-Sponsor Secondary Buyout
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a secondary buyout case study, and why is it harder than a normal LBO?
A secondary buyout is one financial sponsor buying from another. A normal LBO case hands you a business that has never been owned by a professional investor, so the value-creation plan writes itself: professionalize the finance function, take out cost, consolidate procurement, buy a few add-ons. In a secondary, all of that has already been done by a seller who is now charging you for it. The graded skill is diagnosing what is left, pricing it without flattering it, and refusing to assume operating improvement that the last five years have already consumed.
Where does the second owner's return actually come from?
From three places, and you have to be explicit about which. Levers the first owner could not reach — usually because they cost money before they make any, and a fund in year four of its hold has no reason to start them. Levers the first owner reached only partly, where enforcement rather than negotiation is the remaining work. And deleveraging, which is arithmetic rather than achievement. What should not be on the list is a higher exit multiple than you paid: the asset has already re-rated once, and underwriting a second re-rating is a bet on the market rather than an ability to pay.
How do you solve for the maximum price without a circular reference?
By using the fact that the staple is committed in turns of LTM Adjusted EBITDA rather than as a percentage of the price. That fixes funded debt, the interest it carries, the free cash flow it leaves, the sweep and the net debt at exit before you know what you are paying. Gross exit equity value is therefore a constant for a given exit multiple, so the required return pins the sponsor's equity check algebraically once the management incentive pool's share of the gain is netted out, and enterprise value follows from the check plus the debt, less the fees and minimum cash funded at close.
Why does the seller having information advantage matter to the price?
Because it changes what underwriting the seller's plan means. The seller ran the price program it is now selling as an upside, screened the add-on pipeline and bought the best names out of it, wrote the vendor due diligence you are reading, and closes the data room before final bids. The plan may still be achievable. But paying a price that requires the plan is a decision to accept the seller's forecast on the seller's evidence, with less diligence than the seller had — and that is a statement a committee is entitled to see written down rather than buried in a growth rate.
Should a seller rollover make you willing to pay more?
Something, yes — a sponsor rolling a share of its proceeds keeps skin in the outcome and is the strongest available signal that it believes the plan. But the amount is easy to overstate, because in most transaction samples the deals with a rollover are also the smaller ones, and a straight cross-tabulation of multiple against rollover picks up the size effect as well. Holding the comparison inside a deal-size bucket separates them. The disciplined answer concedes the smaller, better-measured number and says explicitly which of the two it is using.
How should you spend the ninety minutes?
Front-load the two exhibits that decide the recommendation: the reconstruction of the first owner's return, and the split of the margin bridge into what repeats and what does not. Everything downstream — the forward case, the debt schedule, the solve — is mechanical once those are right, and wrong in an unrecoverable way if they are not. Leave real time for the raw extract, which cannot be screened in two minutes and is graded, and for the deck. The deck is expected to be a skeleton of headline pages rather than a finished book, but a submission with no deck has not made a recommendation at all.
About This Secondary Buyout / Ability-to-Pay Case Study
Secondary Buyout / Ability-to-Pay case study for investment banking interviews. 90-minute format covering second-owner value creation thesis, residual value after the first sponsor, ability-to-pay under a compressed multiple. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Leveraged Buyouts. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
90-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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