Private equity case study: Tidewater Freight
Tidewater is an asset-light truckload freight broker with $1 billion of gross revenue. The seller says $450 million is cheap. Should our fund buy it? The full solution is below: the structure, every exhibit, the math, a model answer and the mistakes to avoid.
- Type
- Private equity
- Difficulty
- Medium
- Length
- About 30 minutes
- Format
- Interviewer led
The case
The interviewer reads this aloud. Try it before you read on.
Our fund is looking at Tidewater Freight Brokerage, a US truckload freight broker. Tidewater owns no trucks. Shippers pay it to move their loads, and it pays independent carriers to haul them, keeping the difference. Last year it billed $1 billion of gross revenue and earned $50 million of EBITDA. The owner wants $450 million and the banker calls it a bargain at less than half of revenue. Lenders will provide debt of 4.5 times EBITDA. Our fund targets a 20% IRR over five years, about 2.5 times our money. Should we buy Tidewater at that price?
Facts the interviewer gives if you ask
- What is net revenue here?
- Gross revenue minus what Tidewater pays carriers. Last year that was $160 million on $1 billion of gross revenue.
- What are the debt terms?
- Debt of 4.5 times last year's EBITDA, so $225 million, at 8% interest on the entry balance, $18 million a year.
- Should I include fees?
- No, ignore fees and expenses.
- What exit multiple should I assume?
- Exit at 9 times EBITDA in year 5, the same multiple as entry.
- How much capex does it need?
- Very little, about $2 million a year, mostly software. It owns no trucks or warehouses.
- Tell me about the largest customer.
- Shipper A, a national retailer, is 25% of net revenue. Its contract renews in 18 months. Management estimates Shipper A contributes about $15 million of EBITDA. That is its net revenue less the costs that would go with it, so it is above the 31% company margin: the office, systems and most staff would stay if it left.
- How does it plan to grow?
- By adding sales reps and winning more lanes with mid-sized shippers. The plan grows EBITDA from $50 million to $70 million in five years.
The solution, step by step
How the case runs in the interview, in 5 steps. Each step has the interviewer's question, the exhibit or data shown, and what a strong answer says.
- 1
Structure the problem
The interviewer asks: “How would you decide whether to buy Tidewater at $450 million?”
A strong structure
- 1Market: freight cycle, truckload spot and contract rates, share gains
- 2Business quality: net revenue, gross margin stability, EBITDA conversion, customer concentration
- 3Valuation: the right earnings base and multiple for an asset-light broker
- 4Returns: EBITDA growth, cash conversion and debt paydown, MOIC and IRR
- 5Risks and diligence: losing a top shipper, a freight downturn, rep turnover
A strong answer
A framework: the freight market and its cycle, business quality (net revenue rather than gross, how stable the gross margin is, how much of net revenue becomes EBITDA and cash, and customer concentration), valuation on the right base, returns against 2.5x, and risks. A strong candidate challenges the banker's framing at once: for a broker, gross revenue is mostly carrier pay passed through, so the price should be judged on EBITDA. $450 million is 9x the $50 million of EBITDA, a full price, so the hypothesis is that the deal only works if cash conversion is high and the customers are sticky.
- 2
Read the exhibits
The interviewer asks: “Here is Tidewater's gross and net revenue over five years, and its top shippers by net revenue. What do you take from them?”
Exhibit 1
Tidewater gross revenue and net revenue, last five years
Gross revenue and net revenue (gross revenue minus carrier pay), $M. LTM is last year.
Gross revenueNet revenue$MTidewater gross revenue and net revenue, last five years Category Gross revenue ($M) Net revenue ($M) Y-4 900 135 Y-3 1,300 170 Y-2 1,150 165 Y-1 950 150 LTM 1,000 160 What to notice
- Gross revenue swings with the freight cycle, from about $900 million to $1.3 billion and back to $1 billion.
- Net revenue is far steadier, about $135 million to $170 million, and $160 million today.
- The price is 0.45x gross revenue but 2.8x net revenue and 9x EBITDA.
Exhibit 2
Tidewater net revenue by shipper, last year
Net revenue in $M and share of net revenue in %, top five shippers and the rest.
Tidewater net revenue by shipper, last year Shipper Net revenue ($M) Share (%) Contract Shipper A 40 25 Renews in 18 months Shipper B 16 10 Renews in 3 years Shipper C 12 7.5 Annual bids Shipper D 8 5 Annual bids Shipper E 8 5 Annual bids About 400 others 76 47.5 Total 160 100 What to notice
- Shipper A is $40 million, 25% of net revenue, and renews in 18 months.
- The top five are 52.5% of net revenue.
- About 400 other shippers make up the remaining 47.5%.
A strong answer
Gross revenue swings with the freight cycle, from about $900 million up to about $1.3 billion and back to $1 billion. Net revenue is much steadier, between about $135 million and $170 million, and is $160 million today. So net revenue is the real top line, and $450 million is 2.8x net revenue. EBITDA is $50 million, about 31% of net revenue. On customers, Shipper A is $40 million, 25% of net revenue, and its contract renews in 18 months. The top five are $84 million, 52.5%, and the other roughly 400 shippers are 47.5%. Shipper A is the risk to price.
- 3
Do the math
The interviewer asks: “Here is the cash flow plan, with interest on the $225 million of entry debt. Assume all free cash flow repays debt. What is our equity going in, what is it worth at exit, and what are the MOIC and IRR? Where does the return come from?”
Exhibit 3
Tidewater cash flow plan, years 1 to 5
EBITDA and cash items in $M (outflows negative). Interest is 8% on the $225M of entry debt.
Tidewater cash flow plan, years 1 to 5 Line Year 1 Year 2 Year 3 Year 4 Year 5 EBITDA 54 58 62 66 70 Interest −18 −18 −18 −18 −18 Taxes −8 −9 −10 −11 −12 Capex −2 −2 −2 −2 −2 Working capital −1 −1 −1 −1 −1 Free cash flow 25 28 31 34 37 What to notice
- Free cash flow is $25M, $28M, $31M, $34M and $37M, $155 million in total.
- Capex is only $2 million a year, so EBITDA minus capex is about 96% of EBITDA.
- Free cash flow after interest and tax rises from 46% to 53% of EBITDA.
A strong answer
Entry: EV $450 million, debt 4.5 x $50M = $225 million, equity $225 million. Free cash flow: $25M, $28M, $31M, $34M and $37M, so $155 million repays debt and net debt at exit is $225M − $155M = $70 million. Exit EV 9 x $70M = $630 million, exit equity $630M − $70M = $560 million. MOIC $560M / $225M is about 2.5x, about 20%. Cash conversion is strong: EBITDA minus capex is $52M of $54M in year 1, about 96%, and free cash flow after interest and tax rises from 46% to 53% of EBITDA. Attribution of the $335 million gain: EBITDA growth $20M x 9 = $180 million, deleveraging $155 million, multiple expansion zero.
Every number, worked out37 calculations
Every number, worked out Number Worked out Result Entry EV ($M) 9 × 50 450 Price on gross revenue (x) 450 ÷ 1,000 0.45 Price on net revenue (x) 450 ÷ 160 2.81 EBITDA as share of net revenue (%) 50 ÷ 160 × 100 31.25 Top five shippers net revenue ($M) 40 + 16 + 12 + 8 + 8 84 Top five share (%) 84 ÷ 160 × 100 52.5 Shipper A share (%) 40 ÷ 160 × 100 25 Entry debt ($M) 4.5 × 50 225 Entry equity ($M) 450 − 225 225 Interest per year ($M) 0.08 × 225 18 Year 1 FCF ($M) 54 − 18 − 8 − 2 − 1 25 Year 2 FCF ($M) 58 − 18 − 9 − 2 − 1 28 Year 3 FCF ($M) 62 − 18 − 10 − 2 − 1 31 Year 4 FCF ($M) 66 − 18 − 11 − 2 − 1 34 Year 5 FCF ($M) 70 − 18 − 12 − 2 − 1 37 Cumulative paydown ($M) 25 + 28 + 31 + 34 + 37 155 Net debt at exit ($M) 225 − 155 70 Exit EV ($M) 9 × 70 630 Exit equity ($M) 630 − 70 560 MOIC (x) 560 ÷ 225 2.49 IRR (%) ((560 ÷ 225)^(1 ÷ 5) − 1) × 100 20.01 Year 1 EBITDA minus capex share (%) (54 − 2) ÷ 54 × 100 96.3 Year 1 FCF share of EBITDA (%) 25 ÷ 54 × 100 46.3 Year 5 FCF share of EBITDA (%) 37 ÷ 70 × 100 52.9 Equity gain ($M) 560 − 225 335 Gain from EBITDA growth ($M) (70 − 50) × 9 180 Gain from deleveraging ($M) 225 − 70 155 Attribution total ($M) 180 + 155 + 0 335 Exit EBITDA without Shipper A ($M) 70 − 15 55 Exit EV without Shipper A ($M) 9 × 55 495 Exit equity without Shipper A ($M) 495 − 70 425 MOIC without Shipper A (x) 425 ÷ 225 1.89 IRR without Shipper A (%) ((425 ÷ 225)^(1 ÷ 5) − 1) × 100 13.56 Year 1 EBITDA minus capex ($M) 54 − 2 52 MOIC if exit net debt is forgotten (x) 630 ÷ 225 2.8 Earn-out that keeps 2.5x without Shipper A ($M) 225 − 425 ÷ 2.5 55 Debt paydown share of the gain (%) 155 ÷ 335 × 100 46.3 - 4
Brainstorm the options
The interviewer asks: “What could go wrong, and what would you diligence before signing?”
The interviewer adds
- Management estimates Shipper A contributes about $15 million of EBITDA. That is its net revenue less the costs that would go with it, so it is above the 31% company margin: the office, systems and most staff would stay if it left.
- Suppose Shipper A leaves in year 5, just before exit, so the debt paydown is about the same.
A strong answer
Losing Shipper A: year-5 EBITDA $70M − $15M = $55 million, exit EV 9 x $55M = $495 million, equity $495M − $70M = $425 million, 1.9x, about 14%. So the deal still returns capital comfortably, thanks to the fast paydown, but misses the target. Other risks: a freight downturn squeezing the gross margin as carrier costs rise faster than contract rates, sales rep turnover taking shippers with them, the growth plan needing many new reps, and digital brokers competing on price. Diligence: Shipper A's contract terms and a reference call, net revenue retention by shipper cohort, gross margin through the last downturn, rep tenure and productivity, and working capital needs if shippers pay slower.
- 5
Make the recommendation
The interviewer asks: “What do you tell the investment committee?”
A strong recommendation
Invest at up to $450 million, with conditions on Shipper A. The price is 9x EBITDA and 2.8x net revenue, a full multiple, not a bargain at 0.45x gross revenue. It works because net revenue is steady at about $160 million, EBITDA minus capex is about 96% of EBITDA, and $155 million of free cash flow takes debt from $225 million to $70 million: exit equity of $560 million on $225 million is about 2.5x, about 20%, with $180 million from EBITDA growth and $155 million from paydown. Shipper A is 25% of net revenue and about $15 million of EBITDA: losing it gives about 1.9x, about 14%. So confirm its renewal in diligence and hold back about $55 million as an earn-out paid on renewal, which keeps about 2.5x even if Shipper A leaves. Next steps: Shipper A reference call, retention by shipper cohort, margins in the last downturn, rep retention.
The model answer
A strong candidate's whole answer, as it sounds out loud. The marked phrases are explained below.
- 1Reframe the priceReject the revenue multiple and restate $450 million as 9x EBITDA, with a hypothesis that cash conversion and customers decide it.
- 2FrameworkMarket, business quality, valuation and returns, risks.
- 3Read the exhibitsNet revenue is the steady top line at 2.8x, and Shipper A is 25% of it.
- 4Returns and attribution$155 million of paydown, $560 million of exit equity, about 2.5x, split into $180 million of growth and $155 million of paydown.
- 5Downside and diligenceLosing Shipper A gives about 1.9x, plus the freight cycle and rep risks.
- 6RecommendationInvest with an earn-out tied to Shipper A's renewal, and next steps.
So the question is whether to buy Tidewater for $450 million, with debt at 4.5 times EBITDA, against our target of about 2.5 times in five years. The banker says it's cheap at less than half of revenue. I'd push back on that framing first. A broker's gross revenue is mostly carrier pay passing through. What Tidewater keeps is net revenue, and what we can lever and sell is EBITDA. On $50 million of EBITDA, $450 million is 9 times. That's a full price, so my hypothesis is that this only works if the cash conversion is very high and the customers are sticky.
To decide, I'd look at four things. The market and the freight cycle. Business quality, meaning net revenue, how steady the margin is, how much of it turns into EBITDA and cash, and how concentrated the shippers are. Then valuation and returns, built from EBITDA growth and debt paydown. And finally the risks and what to diligence.
On the chart, gross revenue swings a lot, from about $900 million up to about $1.3 billion and back down to $1 billion. That's freight rates moving. Net revenue is much steadier, between about $135 million and $170 million, and it's $160 million today. So the real top line is $160 million, and $450 million is 2.8 times that. EBITDA of $50 million is about 31% of net revenue. On the shipper table, Shipper A is $40 million, a quarter of net revenue, and it renews in 18 months. The top five are 52.5%. That's the risk I'd want to price.
Now the returns. Entry is $450 million, debt is 4.5 times $50 million, so $225 million, and our equity is $225 million. From the cash flow plan, free cash flow is $25 million, $28 million, $31 million, $34 million and $37 million. That adds to $155 million, all to debt, so net debt at exit is $225 million minus $155 million, $70 million. EBITDA reaches $70 million, and at 9 times the exit value is $630 million. Equity is $630 million minus $70 million, $560 million. Divided by $225 million, that's about 2.5 times, so about 20%.
Where does it come from? The equity grows by $335 million. EBITDA growth of $20 million at 9 times is $180 million. Debt paydown is $155 million. There's no multiple expansion, since we exit where we enter. So almost half the gain is just cash paying down debt, which is what an asset-light business buys you. Capex is only $2 million a year, so in year 1, EBITDA minus capex is $52 million of the $54 million, about 96%. Even after interest and tax, free cash flow goes from 46% to 53% of EBITDA.
The risk I'd price is Shipper A. Thanks, so it contributes about $15 million of EBITDA. If it left in year 5, exit EBITDA would be $55 million, the exit value $495 million, and with net debt still about $70 million, equity would be $425 million. That's about 1.9 times, roughly 14%. So we wouldn't lose money, because the paydown protects us, but we'd miss the target. Other risks are a freight downturn where carrier costs rise faster than contract rates and squeeze net revenue, sales reps leaving with their shippers, and the plan needing a lot of new reps to hit $70 million.
For diligence I'd want Shipper A's contract and a reference call with them, net revenue retention by shipper cohort, the gross margin through the last downturn, rep tenure and productivity, and working capital if shippers start paying slower.
So my recommendation is to invest, at up to $450 million, but to price the concentration. This isn't a bargain at 0.45 times revenue. It's a full 9 times EBITDA. It works because net revenue is steady, the business turns almost all of its EBITDA into cash, and debt falls from $225 million to $70 million, giving about 2.5 times. I'd make it conditional on confirming Shipper A's renewal, and hold back about $55 million as an earn-out paid when Shipper A renews. If it leaves, we keep that $55 million and still make about 2.5 times. The key risk is losing Shipper A, which takes us to about 1.9 times. Next steps are the Shipper A call, cohort retention and the margin history through the last downturn.
Why this answer works
Value a broker on what it keeps
Gross revenue includes carrier pay that passes straight through. Net revenue and EBITDA are the base for valuation, so 0.45x revenue can still be a full 9x EBITDA.
Cash conversion is a return driver
With almost no capex, free cash flow repays $155 million of debt, nearly half of the equity gain without any multiple expansion.
Price concentration, don't just list it
Sizing what losing the top shipper does to the return (about 1.9x) turns a risk into a deal term, like an earn-out tied to its renewal.
The phrases that do the work
“On $50 million of EBITDA, $450 million is 9 times.”
Right valuation base. Moving from a revenue multiple to an EBITDA multiple at once shows the candidate knows how brokers are valued.
“So the real top line is $160 million, and $450 million is 2.8 times that.”
Quality of revenue. Separating pass-through revenue from what the business keeps is the first read of any broker.
“So almost half the gain is just cash paying down debt”
Returns attribution. Splitting the gain shows where the return comes from and how much rests on the growth plan.
“So we wouldn't lose money, because the paydown protects us, but we'd miss the target.”
Downside framed. Stating both capital protection and the miss gives the committee the real trade-off.
Common mistakes on this case
- 1Accepting the banker's 0.45x revenue as cheap. For a broker the base is EBITDA: $450 million is 9x, a full price.
- 2Treating the gross revenue swings as business volatility. Net revenue moved far less, from about $135 million to $170 million.
- 3Forgetting to subtract the $70 million of net debt left at exit, which overstates the equity at $630 million and the MOIC at 2.8x.
- 4Leaving out the deleveraging in the attribution. $155 million of the $335 million gain is debt paydown, not EBITDA growth.
- 5Listing Shipper A as a risk without sizing it. Losing its $15 million of EBITDA takes the return to about 1.9x.
Now run this case out loud
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Questions people ask
Is Tidewater Freight Brokerage a real company?
No. Tidewater Freight Brokerage is an invented client, and every number is case data written for practice. The numbers reconcile, so you can check your math against the solution.
How long does this case take?
About 30 minutes out loud, the length of one interview case. It is rated medium.
How should I use this solution?
Try the case first. Read the prompt and the facts, write your structure and work the numbers, then compare each step with the walkthrough and the model answer.
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