WALL STREET PREP: LBO
FUNDAMENTALS QUESTIONS WITH
CORRECT ANSWERS
How do private equity firms exit their position? - correct answer-1) Sale to a Strategic Buyer
2) Secondary Buyout (sponsor-to-sponsor deal) -
less than ideal because another PE firm won't pay a synergy premium
2) IPOs -Joption exclusive to firms of larger size (megafunds) or club deals
Primary Levers in an LBO that drive returns? - correctJanswer-1) Deleveraging -
value of equity owned be PE firms will grow
2) EBITDA Growth -
making operational improvements to teh business's margin profile, implementing new growth strategies to
increase revenue, doing add-on acquisitions that are accretive
3) Multiple Expansion - buy at low multiple and then exit at a higher multiple
How can a company work on margin expansion? - correct answer-1) Build better investor sentiment
2) Better economic conditions
3) Favorable transaction dynamic (strategic rather than another sponsor)
Do PE firms typically assume entry multiple for exit? - correct answer-
ItJis popular to assume exit is the same as entry -
since deal environment isJunknown it is too risky to assume it isJhigher
What attributes make a business an ideal LBO candidate? - correct answer-1) Steady, Predictable cash flows
2) Strong mature industry in defensible market positioning
3) Business model with recurring revenue component
3) Strong, Committed Managment team - possible history or working with PE firms
4) Diverse revenue steams with minimal cyclicality
5) Low capex requirements and working capital needs
6) Currently undervalued by market (low-purchaseJmultiple)
, What industries attract the most LBO deal flow? - correct answer-1) Mature
2) Growing at a moderate rate
3) Non-cyclical
Predictable revenue with fewer disruption risks from technology or new entrants to having a higher barrier
entry
What will a firm look at when the investment strategy is based around roll-up acquisitions? -Jcorrect answer-
Fragmented industries where consolidation strategy is more viable since there are more add-
on targets in the market
Ideal type of products/services being sold? - correct answer-1) Mission Critical -
product/service isJessential to the end market being served. Discontinuity would be detrimental toJbusines
s continuity
2) High SwitchingJCosts - costs to switch would outweightJthe benefits of moving to a lower-cost provider
3) RecurringJRevenue Component - products/servicesJrequire MAINTENANCE
What is the typical capital structure prevalent in LBO transactions? -Jcorrect answer-
Currently around 60/40 debt to equity
Debt: They will be in different tranches with most beingJsenior
Equity: Contribution will mostly come from the financial sponsor with in someJcases an existing manageme
nt team. Also, since LBOs typically retain existing management team - sponsors will reserve 3% -
20% of the total equity as an incentive for the management team toJmeetJfinancial targets
WhatJcredit ratiosJwould you lookJat when assessingJthe financial health of a borrower? -Jcorrect answer-
1) Total Debt / EBITDA
2) Senior Debt / EBITDA
3) Net Debt / EBITDA
4) Interest Coverage Ratio - EBITDA / Interest Expense
Is it better for the interest coverage ratio to be higher or lower? - correct answer-Higher (typically over 2x)
FUNDAMENTALS QUESTIONS WITH
CORRECT ANSWERS
How do private equity firms exit their position? - correct answer-1) Sale to a Strategic Buyer
2) Secondary Buyout (sponsor-to-sponsor deal) -
less than ideal because another PE firm won't pay a synergy premium
2) IPOs -Joption exclusive to firms of larger size (megafunds) or club deals
Primary Levers in an LBO that drive returns? - correctJanswer-1) Deleveraging -
value of equity owned be PE firms will grow
2) EBITDA Growth -
making operational improvements to teh business's margin profile, implementing new growth strategies to
increase revenue, doing add-on acquisitions that are accretive
3) Multiple Expansion - buy at low multiple and then exit at a higher multiple
How can a company work on margin expansion? - correct answer-1) Build better investor sentiment
2) Better economic conditions
3) Favorable transaction dynamic (strategic rather than another sponsor)
Do PE firms typically assume entry multiple for exit? - correct answer-
ItJis popular to assume exit is the same as entry -
since deal environment isJunknown it is too risky to assume it isJhigher
What attributes make a business an ideal LBO candidate? - correct answer-1) Steady, Predictable cash flows
2) Strong mature industry in defensible market positioning
3) Business model with recurring revenue component
3) Strong, Committed Managment team - possible history or working with PE firms
4) Diverse revenue steams with minimal cyclicality
5) Low capex requirements and working capital needs
6) Currently undervalued by market (low-purchaseJmultiple)
, What industries attract the most LBO deal flow? - correct answer-1) Mature
2) Growing at a moderate rate
3) Non-cyclical
Predictable revenue with fewer disruption risks from technology or new entrants to having a higher barrier
entry
What will a firm look at when the investment strategy is based around roll-up acquisitions? -Jcorrect answer-
Fragmented industries where consolidation strategy is more viable since there are more add-
on targets in the market
Ideal type of products/services being sold? - correct answer-1) Mission Critical -
product/service isJessential to the end market being served. Discontinuity would be detrimental toJbusines
s continuity
2) High SwitchingJCosts - costs to switch would outweightJthe benefits of moving to a lower-cost provider
3) RecurringJRevenue Component - products/servicesJrequire MAINTENANCE
What is the typical capital structure prevalent in LBO transactions? -Jcorrect answer-
Currently around 60/40 debt to equity
Debt: They will be in different tranches with most beingJsenior
Equity: Contribution will mostly come from the financial sponsor with in someJcases an existing manageme
nt team. Also, since LBOs typically retain existing management team - sponsors will reserve 3% -
20% of the total equity as an incentive for the management team toJmeetJfinancial targets
WhatJcredit ratiosJwould you lookJat when assessingJthe financial health of a borrower? -Jcorrect answer-
1) Total Debt / EBITDA
2) Senior Debt / EBITDA
3) Net Debt / EBITDA
4) Interest Coverage Ratio - EBITDA / Interest Expense
Is it better for the interest coverage ratio to be higher or lower? - correct answer-Higher (typically over 2x)
