LBO Model Questions and Answers
Walk me through a basic LBO Model.
In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity Ratio,
Interest Rate on Debt and other variables; you might also assume something about the
company’s operations such as Revenue Growth or Margins, depending on how much
information you have.
Step 2 is to create a Source and Use section, which shows how you finance the transaction and
what you use the capital for; this also tells you how much Investor Equity is requried,
Step 3 is to adjust the company’s Balance Sheet for the new Debt and Equity figures, and also
add in Goodwill and Other Intangibles on the Assets side to make everything balance.
Step 4, you project out the company’s income statement, balance sheet and Cash Flow
Statement, and determine how much debt is paid off each year, based on the available Cash
Flow and the required Interest Payments.
Finally, in Step 5, you make assumptions about the exit after several years, usually assuming an
EITDA Exit Multiple, and calculate the return based on how much equity is returned to the firm.
What is a leveraged buyout?
In an LBO, a private equity firm will acquirer another company using a combination of debt and
equity, they'll operate the company and sell the company at the end to hopefully realize a return
on the investment.
The PE firm will use the cash flows generated to pay off the interest expense on Debt and often
the principal payment its self.
The acquired company is often used collateral for the debt and this method works because
leverage amplifies returns.
Why do PE firms uses leverage when buying companies?
To amplify returns. Leverage does not "increase returns" just increases the effects of outcome.
Positive returns will become even more positive and negative returns will become even more
negative.
It also frees up cash for a PE firm to do something else with capital
, Walk me through a basic LBO MODEL?
In an LBO Model, in
Step 1 we will make assumptions for the Purchase Price, Debt and Equity, Interest Rate on
Debt, and other variables such as the company's revenue growth and margins.
In Step 2 you create a Sources and Uses schedule to show exactly how much in Investor Equity
the PE firm contributes; you also create a Purchase Price Allocation schedule to calculate the
Goodwill.
In Step 3 you adjust the company's balance sheet for new debt and equity figures, allocate the
purchase price and add goodwill and other intangibles to asset side to make everything
In Step 4 you project the company's Income Statement, Balance sheet, and cash flow
statement, and determine how much Debt it repays each year based on its Free Cash Flow FCF
Finally, in Step 5, you make assumptions about the exit, usually assuming EBITDA Exit multiple
and you calculate the IRR and Money-on-Money multiple based on the proceeds the PE firm
earns at the end.
In an LBO Model, in
Step 1 we will make assumptions for the Purchase Price, Debt and Equity, Interest Rate on
Debt, and other variables such as the company's revenue growth and margins.
In Step 2 you create a Sources and Uses schedule to show exactly how much in Investor Equity
the PE firm contributes; you also create a Purchase Price Allocation schedule to calculate the
Goodwill.
In Step 3 you adjust the company's balance sheet for new debt and equity figures, allocate the
purchase price and add goodwill and other intangibles to asset side to make everything
In Step 4 you project the company's Income Statement, Balance sheet, and cash flow
statement, and determine how much Debt it repays each year based on its Free Cash Flow FCF
Finally, in Step 5, you make assumptions about the exit, usually assuming EBITDA Exit multiple
and you calculate the IRR and Money-on-Money multiple based on the proceeds the PE firm
earns at the end.
Walk me through a basic LBO Model.
In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity Ratio,
Interest Rate on Debt and other variables; you might also assume something about the
company’s operations such as Revenue Growth or Margins, depending on how much
information you have.
Step 2 is to create a Source and Use section, which shows how you finance the transaction and
what you use the capital for; this also tells you how much Investor Equity is requried,
Step 3 is to adjust the company’s Balance Sheet for the new Debt and Equity figures, and also
add in Goodwill and Other Intangibles on the Assets side to make everything balance.
Step 4, you project out the company’s income statement, balance sheet and Cash Flow
Statement, and determine how much debt is paid off each year, based on the available Cash
Flow and the required Interest Payments.
Finally, in Step 5, you make assumptions about the exit after several years, usually assuming an
EITDA Exit Multiple, and calculate the return based on how much equity is returned to the firm.
What is a leveraged buyout?
In an LBO, a private equity firm will acquirer another company using a combination of debt and
equity, they'll operate the company and sell the company at the end to hopefully realize a return
on the investment.
The PE firm will use the cash flows generated to pay off the interest expense on Debt and often
the principal payment its self.
The acquired company is often used collateral for the debt and this method works because
leverage amplifies returns.
Why do PE firms uses leverage when buying companies?
To amplify returns. Leverage does not "increase returns" just increases the effects of outcome.
Positive returns will become even more positive and negative returns will become even more
negative.
It also frees up cash for a PE firm to do something else with capital
, Walk me through a basic LBO MODEL?
In an LBO Model, in
Step 1 we will make assumptions for the Purchase Price, Debt and Equity, Interest Rate on
Debt, and other variables such as the company's revenue growth and margins.
In Step 2 you create a Sources and Uses schedule to show exactly how much in Investor Equity
the PE firm contributes; you also create a Purchase Price Allocation schedule to calculate the
Goodwill.
In Step 3 you adjust the company's balance sheet for new debt and equity figures, allocate the
purchase price and add goodwill and other intangibles to asset side to make everything
In Step 4 you project the company's Income Statement, Balance sheet, and cash flow
statement, and determine how much Debt it repays each year based on its Free Cash Flow FCF
Finally, in Step 5, you make assumptions about the exit, usually assuming EBITDA Exit multiple
and you calculate the IRR and Money-on-Money multiple based on the proceeds the PE firm
earns at the end.
In an LBO Model, in
Step 1 we will make assumptions for the Purchase Price, Debt and Equity, Interest Rate on
Debt, and other variables such as the company's revenue growth and margins.
In Step 2 you create a Sources and Uses schedule to show exactly how much in Investor Equity
the PE firm contributes; you also create a Purchase Price Allocation schedule to calculate the
Goodwill.
In Step 3 you adjust the company's balance sheet for new debt and equity figures, allocate the
purchase price and add goodwill and other intangibles to asset side to make everything
In Step 4 you project the company's Income Statement, Balance sheet, and cash flow
statement, and determine how much Debt it repays each year based on its Free Cash Flow FCF
Finally, in Step 5, you make assumptions about the exit, usually assuming EBITDA Exit multiple
and you calculate the IRR and Money-on-Money multiple based on the proceeds the PE firm
earns at the end.
