The sweep decides who holds the cash, the lender or the company, and that moves leverage far more than it moves the sponsor's return.
A cash sweep sends a fixed share of each year's excess cash flow, the cash left after tax, capex, working capital, interest and scheduled amortisation, to prepay the term loan. On an illustrative buyout with 275.0 of debt at 7 per cent, a 75 per cent sweep takes the loan down to 179.0 in five years and gross leverage from 5.50x to 2.68x. The sponsor's IRR is 17.64 per cent, only 0.23 points above the 17.41 with no sweep at all.
Worked in full in The Buyout Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The sweep is the line in an LBO model that makes debt fall faster than the amortisation schedule says. Lenders insist on it because it converts the company's cash into their repayment. Sponsors accept it because, as the arithmetic below shows, the cash is mostly theirs either way: what it changes is risk, not return.
| Input | Value |
|---|---|
| EBITDA at entry, growth a year | 50.0, 6% |
| Entry and exit multiple | 9.0x |
| Enterprise value / fees / sponsor equity | 450.0 / 25.0 / 200.0 |
| Term loan (5.50x EBITDA), interest on opening balance | 275.0 at 7% |
| Mandatory amortisation, share of the original loan | 1%, 2.75 a year |
| Capex (equal to D&A), share of EBITDA | 16% |
| Working capital investment, share of EBITDA growth | 15% |
| Tax rate / interest earned on retained cash | 25% / 3% |
| Excess cash flow sweep | 75% |
Cash before debt service = EBITDA − capex − working capital − tax + interest on cash
Excess cash flow = cash before debt service − interest − mandatory amortisation
Sweep = MIN(debt after amortisation, MAX(0, excess cash flow) × sweep %)
In Excel: =MIN(OpenDebt-Amort, MAX(0,ECF)*Sweep). Interest is charged on the opening balance, =OpenDebt*Rate, which avoids the circular reference that the average balance would create.
Year 1: EBITDA grows to 53.0. After capex, working capital and 6.3 of tax, the company generates 37.8 before debt service. It pays 19.3 of interest on the opening 275.0 and 2.75 of amortisation, leaving 15.8 of excess cash flow. Seventy-five per cent of that, 11.8, prepays the loan, which closes the year at 260.4; 3.9 stays on the balance sheet.
| Year | EBITDA | Opening debt | Interest | Excess cash flow | Swept | Closing debt | Cash | Net leverage |
|---|---|---|---|---|---|---|---|---|
| 1 | 53.0 | 275.0 | 19.3 | 15.8 | 11.8 | 260.4 | 3.9 | 4.84x |
| 2 | 56.2 | 260.4 | 18.2 | 18.6 | 13.9 | 243.7 | 8.6 | 4.19x |
| 3 | 59.6 | 243.7 | 17.1 | 21.7 | 16.2 | 224.8 | 14.0 | 3.54x |
| 4 | 63.1 | 224.8 | 15.7 | 25.0 | 18.7 | 203.3 | 20.2 | 2.90x |
| 5 | 66.9 | 203.3 | 14.2 | 28.6 | 21.5 | 179.0 | 27.4 | 2.27x |
The sweep accelerates because it feeds itself: each prepayment lowers next year's interest, which raises next year's excess cash flow. Interest falls from 19.3 to 14.2 while EBITDA grows by a third.
At exit the company is worth 602.2 at 9.0x. Net debt is 151.6, the 179.0 of loan less 27.4 of cash, so the sponsor receives 450.6: 2.25x and an IRR of 17.64 per cent.
| Sweep | Debt at exit | Cash at exit | Net debt | Gross leverage | Total interest | MOIC | IRR |
|---|---|---|---|---|---|---|---|
| 0% | 261.2 | 105.3 | 155.9 | 3.90x | 94.3 | 2.23x | 17.41% |
| 50% | 207.2 | 54.1 | 153.1 | 3.10x | 87.8 | 2.25x | 17.56% |
| 75% | 179.0 | 27.4 | 151.6 | 2.68x | 84.5 | 2.25x | 17.64% |
| 100% | 150.2 | 0.0 | 150.2 | 2.24x | 81.1 | 2.26x | 17.71% |
| 75 / 50 / 25% grid | 192.5 | 40.7 | 151.8 | 2.25x | 17.63% |
Moving from no sweep to a full sweep adds 5.8 of exit equity and 0.30 points of IRR. The whole gain is the spread between 7 per cent paid on the loan and 3 per cent earned on cash, 5.25 against 2.25 per cent after tax. Gross leverage at exit, the number lenders and the next buyer's lenders look at, moves from 3.90x to 2.24x.
The last row is the shape most credit agreements actually use: 75 per cent while leverage is above 4.0x, 50 per cent down to 3.0x, 25 per cent below. On this deal the step-down applies from year 4 and changes the IRR by a hundredth of a point.
Where the sweep does move returns: when the alternative is not cash on the balance sheet but a dividend to the sponsor, or when the debt is far more expensive than cash earns, as with a second lien or a payment-in-kind note. Then the sweep is a real transfer of timing, and the recap arithmetic applies in reverse.
The common mistake is to let retained cash disappear. A model with a 50 per cent sweep that values the exit at enterprise value less debt, forgetting the 54.1 of cash, shows 395.0 of exit equity, 1.98x and 14.58 per cent. Run the no-sweep case the same way and its 105.3 of cash vanishes too, leaving 11.26 per cent, so the sweep looks worth 3.32 points of IRR. It is worth 0.15. The second mistake is to charge interest on the average balance and then break the circularity with a macro or an iteration setting that nobody remembers is switched on.
Build the sweep as a MIN of debt outstanding and a share of excess cash flow, on opening balances. Here a 75 per cent sweep repays 96.0 of a 275.0 loan in five years and halves leverage, while changing the sponsor's IRR by less than a third of a point. The book's case runs a term loan, a second lien and a revolver with a sweep in the free LBO workbook for The Buyout Investor; for the one-page version, see how to solve a paper LBO, and for how the credit agreement defines the excess cash flow being swept, how to calculate an excess cash flow sweep.
Cash generated after tax, capex, working capital, interest and scheduled amortisation. On the illustrative deal year 1 produces 37.8 before debt service, pays 19.3 of interest and 2.75 of amortisation, and leaves 15.8 of excess cash flow. A 75 per cent sweep sends 11.8 of it to prepay the term loan and leaves the rest in the company.
Only by the spread between what the debt costs and what retained cash earns. On the illustrative deal a 100 per cent sweep lifts the IRR from 17.41 to 17.71 per cent against no sweep, 0.30 points, because cash left in the company is netted against debt at exit. The sweep matters far more to leverage: 2.24x at exit against 3.90x.
Because the sweep depends on cash after interest, and interest depends on the debt the sweep repays. Charging interest on the average balance creates a circular reference. Using the opening balance breaks it at a small cost in precision, and is how most practitioners and the book's own model build the schedule.
This article is one calculation from The Buyout Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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