LBO
Model
What
is
an
LBO?
A
leveraged
buyout
is
the
acquisition
of
a
company
using
debt
instruments
as
the
majority
of
the
purchase
price.
Pros:
1.
Valuation
is
realistic
as
it
does
not
require
synergies
to
achieve.
Cons:
1.
Ignoring
synergies
could
result
in
an
underestimated
valuation.
2.
Very
sensitive
to
operating
(growth
rate,
margins,
etc)
and
financial
(multiples)
assumptions.
Why
would
you
use
leverage
when
buying
a
company?
To
boost
the
investor's
return.
The
less
of
their
own
capital
is
invested,
the
easier
it
is
to
earn
a
higher
return.
Another
benefit
is
that
the
investor
also
has
more
capital
available
to
purchase
other
companies
because
they've
used
leverage.
What
variables
impact
an
LBO
model
the
most?
1.
Purchase
and
exit
multiples
have
the
biggest
impact
on
the
returns
of
a
model.
2.
The
amount
of
leverage
(debt)
used
also
has
a
significant
impact.
3.
Operational
characteristics
such
as
revenue
growth
and
EBITDA
margins.
How
do
you
pick
purchase
multiples
and
exit
multiples
in
an
LBO
model?
You
look
at
the
range
of
multiples
for
similar
LBO
transactions
of
comparable
companies,
and
choose
the
multiples
appropriate
for
your
situation.
Sometimes
you
set
purchase
and
exit
multiples
based
on
a
specific
IRR
target
that
you're
trying
to
achieve
-
but
this
is
just
for
valuation
purposes
if
you're
using
an
LBO
model
to
value
the
company. What
is
an
"ideal"
candidate
for
an
LBO?
"Ideal"
candidates
have:
1.
Stable
and
predictable
cash
flows
2.
Low-risk
businesses
3.
Not
much
need
for
ongoing
investments
such
as
CapEx
4.
Opportunities
for
expense
reductions
to
boost
their
margins
5.
A
strong
management
team
6.
A
base
of
assets
to
use
as
collateral
for
debt
The
most
important
part
is
stable
cash
flow.
How
do
you
use
an
LBO
model
to
value
a
company,
and
why
do
we
sometimes
say
that
it
sets
the
"floor
valuation"
for
the
company?
You
use
it
to
value
a
company
by
setting
a
targeted
IRR
(e.g.,
25%)
and
then
back-solving
to
determine
what
purchase
price
the
PE
firm
could
pay
to
achieve
that
IRR.
This
is
sometimes
called
a
"floor
valuation"
because
PE
firms
almost
always
pay
less
for
a
company
than
strategic
acquirers
would.
Give
an
example
of
a
"real-life"
LBO.
The
most
common
analogy
is
taking
out
a
mortgage
when
you
buy
a
house.
•
Down
Payment:
Investor
Equity
•
Mortgage:
Debt
•
Mortgage
Interest
Payments:
Debt
Interest
•
Mortgage
Repayments:
Debt
Principal
Repayments
•
Selling
the
House:
Selling
the
Company
/
Taking
It
Public
Can
you
explain
how
the
Balance
Sheet
is
adjusted
in
an
LBO
model?
First,
the
Liabilities
&
Equities
side
is
adjusted
-
the
new
debt
is
added
on,
and
the
Shareholders'
Equity
is
"wiped
out"
and
replaced
by
however
much
equity
the
private
equity
firm
is
contributing.
On
the
Assets
side,
Cash
is
adjusted
for
any
cash
used
to
finance
the
transaction,
and
then
Goodwill
&
Other
Intangibles
are
used
as
a
"plug"
to
make
the
Balance
Sheet
balance.
Model
What
is
an
LBO?
A
leveraged
buyout
is
the
acquisition
of
a
company
using
debt
instruments
as
the
majority
of
the
purchase
price.
Pros:
1.
Valuation
is
realistic
as
it
does
not
require
synergies
to
achieve.
Cons:
1.
Ignoring
synergies
could
result
in
an
underestimated
valuation.
2.
Very
sensitive
to
operating
(growth
rate,
margins,
etc)
and
financial
(multiples)
assumptions.
Why
would
you
use
leverage
when
buying
a
company?
To
boost
the
investor's
return.
The
less
of
their
own
capital
is
invested,
the
easier
it
is
to
earn
a
higher
return.
Another
benefit
is
that
the
investor
also
has
more
capital
available
to
purchase
other
companies
because
they've
used
leverage.
What
variables
impact
an
LBO
model
the
most?
1.
Purchase
and
exit
multiples
have
the
biggest
impact
on
the
returns
of
a
model.
2.
The
amount
of
leverage
(debt)
used
also
has
a
significant
impact.
3.
Operational
characteristics
such
as
revenue
growth
and
EBITDA
margins.
How
do
you
pick
purchase
multiples
and
exit
multiples
in
an
LBO
model?
You
look
at
the
range
of
multiples
for
similar
LBO
transactions
of
comparable
companies,
and
choose
the
multiples
appropriate
for
your
situation.
Sometimes
you
set
purchase
and
exit
multiples
based
on
a
specific
IRR
target
that
you're
trying
to
achieve
-
but
this
is
just
for
valuation
purposes
if
you're
using
an
LBO
model
to
value
the
company. What
is
an
"ideal"
candidate
for
an
LBO?
"Ideal"
candidates
have:
1.
Stable
and
predictable
cash
flows
2.
Low-risk
businesses
3.
Not
much
need
for
ongoing
investments
such
as
CapEx
4.
Opportunities
for
expense
reductions
to
boost
their
margins
5.
A
strong
management
team
6.
A
base
of
assets
to
use
as
collateral
for
debt
The
most
important
part
is
stable
cash
flow.
How
do
you
use
an
LBO
model
to
value
a
company,
and
why
do
we
sometimes
say
that
it
sets
the
"floor
valuation"
for
the
company?
You
use
it
to
value
a
company
by
setting
a
targeted
IRR
(e.g.,
25%)
and
then
back-solving
to
determine
what
purchase
price
the
PE
firm
could
pay
to
achieve
that
IRR.
This
is
sometimes
called
a
"floor
valuation"
because
PE
firms
almost
always
pay
less
for
a
company
than
strategic
acquirers
would.
Give
an
example
of
a
"real-life"
LBO.
The
most
common
analogy
is
taking
out
a
mortgage
when
you
buy
a
house.
•
Down
Payment:
Investor
Equity
•
Mortgage:
Debt
•
Mortgage
Interest
Payments:
Debt
Interest
•
Mortgage
Repayments:
Debt
Principal
Repayments
•
Selling
the
House:
Selling
the
Company
/
Taking
It
Public
Can
you
explain
how
the
Balance
Sheet
is
adjusted
in
an
LBO
model?
First,
the
Liabilities
&
Equities
side
is
adjusted
-
the
new
debt
is
added
on,
and
the
Shareholders'
Equity
is
"wiped
out"
and
replaced
by
however
much
equity
the
private
equity
firm
is
contributing.
On
the
Assets
side,
Cash
is
adjusted
for
any
cash
used
to
finance
the
transaction,
and
then
Goodwill
&
Other
Intangibles
are
used
as
a
"plug"
to
make
the
Balance
Sheet
balance.
