20 Week PE Interview Prep - LBO Modeling Exam

20 Week PE Interview Prep - LBO Modeling Exam Fundamentals of Modeling LBOs - ANSWER ️️ EV/EBITDA is most common multiple for LBOs EV is used because sponsors buy equity in the company but also have to worry about the existing debt because if they are adding more debt on they will most likely break the covenants of the existing debt e.g. company with 600 equity and 200 of debt, the 200 debt will have to be taken into consideration, also new debt will have to be considered so debt is very important to LBOs so use EV Debt capacity is quoted as debt to EBTIDA if EV/EBTIDA = 8x and can finance 5x leverage then 3x equity contribution (40%) companies worth above 9x are tough to pull off because equity contribution will be too high which will drive down IRRs Debt schedule is more robust because this is the emphasis of the LBO Purchase Accounting is essential in LBOs, write offs are common with purchase accounting but these are non cash entry multiple = exit multiple Most LBOs will model several operating scenarios