20 Week PE Interview Prep - LBO
Modeling
Fundamentals of Modeling LBOs - ANSEV/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 - base / mgmt, downside and upside
Components of an LBO - ANSOperating Module
Forecast profitability and cash flows
core statements and supporting schedules
Capital structure
analyze debt capacity
transaction assumptions
debt and interest schedule (more detailed)
ratio analysis (credit analysis / covenants)
Return Analysis
Analyze various exit strategies
equity IRR
, Ratio analysis
taking new capital structure, putting it on top of operating model and then doing returns analysis
Flow of Funds - ANSTake standard operating model
Transaction assumptions - Add Sources and Uses - drives opening balance sheet (new capital
structure)
Feed opening balance sheet (new cap structure) into operating model - new debt and interest
New operating model feeds into returns analysis (equity returns) along with the transaction
assumptions (initial investment)
iterative process because seller has to be happy with purchase price, sponsor has to be happy
with IRRs and lenders have to be happy with debt paydown
Step 1 Offer Value and Transaction Value - ANSCalculate Offer Value (equity value)
Offer value is then used to drive the Transaction value (Enterprise Value)
Public Company:
Current Share Price
Offer price premium (start with 25%)
Offer price per share (current share price * 1+ premium)
x Total Potential Shares (calculated below with effect of in the money options)
= Gross offer value
less options proceeds (new owners of the company receives the options proceeds and can use
them to offset the purchase price)
= Offer Value
+ Total Debt (any debt will have to be refinanced because existing debt holders will have
covenants regarding the amount of debt you can put on the company)
+preferred stock
+minority interest
-other adjustments
- cash (sponsor can use the excess cash above the balance sheet minimum to offset the debt)
= Transaction Value (enterprise Value)
Shares Information
Modeling
Fundamentals of Modeling LBOs - ANSEV/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 - base / mgmt, downside and upside
Components of an LBO - ANSOperating Module
Forecast profitability and cash flows
core statements and supporting schedules
Capital structure
analyze debt capacity
transaction assumptions
debt and interest schedule (more detailed)
ratio analysis (credit analysis / covenants)
Return Analysis
Analyze various exit strategies
equity IRR
, Ratio analysis
taking new capital structure, putting it on top of operating model and then doing returns analysis
Flow of Funds - ANSTake standard operating model
Transaction assumptions - Add Sources and Uses - drives opening balance sheet (new capital
structure)
Feed opening balance sheet (new cap structure) into operating model - new debt and interest
New operating model feeds into returns analysis (equity returns) along with the transaction
assumptions (initial investment)
iterative process because seller has to be happy with purchase price, sponsor has to be happy
with IRRs and lenders have to be happy with debt paydown
Step 1 Offer Value and Transaction Value - ANSCalculate Offer Value (equity value)
Offer value is then used to drive the Transaction value (Enterprise Value)
Public Company:
Current Share Price
Offer price premium (start with 25%)
Offer price per share (current share price * 1+ premium)
x Total Potential Shares (calculated below with effect of in the money options)
= Gross offer value
less options proceeds (new owners of the company receives the options proceeds and can use
them to offset the purchase price)
= Offer Value
+ Total Debt (any debt will have to be refinanced because existing debt holders will have
covenants regarding the amount of debt you can put on the company)
+preferred stock
+minority interest
-other adjustments
- cash (sponsor can use the excess cash above the balance sheet minimum to offset the debt)
= Transaction Value (enterprise Value)
Shares Information
