Module IV· Cash SweepBasic
Question
What is a cash sweep in an LBO?
Answer
What
A contractual obligation to use excess cash for extraordinary debt repayment.
```
Excess Cash = Year-End Cash − Minimum Operating Cash
```
Example
Year-End Cash 25, Min Cash 8 → $17m automatically flows into repayment.
Consequence
Accelerates deleveraging → less interest → more equity value at exit → higher IRR.
Rule of thumb
Sweep 50-100% in aggressive structures, 25-50% conservative. Middle-market deals often 50%.
Pitch tip
Optimal 50-75% with a sweep holiday in Year 1 to build working capital. >75% signals a lack of confidence to lenders.