LBO Guide
Study online at https://quizlet.com/_5llzhq
1. What is a lever- An LBO, is when a private equity firm acquires a company with the combination of
aged buyout, and both debt and equity, operates it between 3-5 years into the future, and sells it to
why does it work? realize a return.
The reason why it works is because it reduces the amount of up front cash by raising
debt from investors, it uses the cash flows to repay the interest on the principle
amount, and then sells it to realize a return.
2. Why do PE The reason why PE firms use leverage is to boost (increase) their returns.
firms use lever-
age when buying
a company?
3. Walk me through In an LBO Model:
a basic LBO mod-
el. Step 1: Make assumptions based on the purchase price, debt/equity ratio, interest
rate on debt, and other variables. You may also want to assume other items such
as revenue growth or margins
Step 2: Create a sources & uses section, which shows how the transaction is being
financed and what the capital is used for; it also tells you how much investor equity
(cash) is required
Step 3: Adjust the balance sheet for the new debt and equity figures, allocate the
purchase price, and add in Goodwill & Other Intangibles on the Assets side to make
everything balance
Step 4: 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 required interest payments
Step 5: Make assumptions about the exit after several years, usually assuming
1/5
, LBO Guide
Study online at https://quizlet.com/_5llzhq
EBITDA Exit Multiple, and calculate the return based on how much equity is
returned to the firm.
4. What variables Purchase and exit multiples ( and therefore purchase and exit prices) have the
impact a lever- greatest impact, followed by the amount of leverage (debt) used.
aged buyout the
most?
5. How do you pick The same way you would do it anywhere else: you look at what comparable
purchase multi- companies are trading at, and what multiples are similar LBO transaction have
ples and exit mul- been completed at. As always, you show a range of purchase price and exit
tiples in an LBO multiples using sensitivity tables.
model?
Sometimes you can set purchase and exit multiples based on a specific IRR Target
that you are trying to achieve.
6. What is an "ideal" 1. Undervalued
candidate for an 2. Stable and Predictable cash flows
LBO? 3. Low risk business
4. No need for further investments in capex
5. Good Management team
6. The room to cut costs and increase margins
7. Solid base of assets to use as collateral for debt
7. How do you use You use it to value a company by setting a target IRR to achieve and then back-solv-
an LBO model to ing using excel to find what purchase price the PE firm could to pay to achieve the
value a company, IRR. It is called a floor valuation because PE firms always pay less than strategic
and why do we acquirer would.
sometimes say
that it sets the
"floor valuation"
for the company?
2/5
Study online at https://quizlet.com/_5llzhq
1. What is a lever- An LBO, is when a private equity firm acquires a company with the combination of
aged buyout, and both debt and equity, operates it between 3-5 years into the future, and sells it to
why does it work? realize a return.
The reason why it works is because it reduces the amount of up front cash by raising
debt from investors, it uses the cash flows to repay the interest on the principle
amount, and then sells it to realize a return.
2. Why do PE The reason why PE firms use leverage is to boost (increase) their returns.
firms use lever-
age when buying
a company?
3. Walk me through In an LBO Model:
a basic LBO mod-
el. Step 1: Make assumptions based on the purchase price, debt/equity ratio, interest
rate on debt, and other variables. You may also want to assume other items such
as revenue growth or margins
Step 2: Create a sources & uses section, which shows how the transaction is being
financed and what the capital is used for; it also tells you how much investor equity
(cash) is required
Step 3: Adjust the balance sheet for the new debt and equity figures, allocate the
purchase price, and add in Goodwill & Other Intangibles on the Assets side to make
everything balance
Step 4: 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 required interest payments
Step 5: Make assumptions about the exit after several years, usually assuming
1/5
, LBO Guide
Study online at https://quizlet.com/_5llzhq
EBITDA Exit Multiple, and calculate the return based on how much equity is
returned to the firm.
4. What variables Purchase and exit multiples ( and therefore purchase and exit prices) have the
impact a lever- greatest impact, followed by the amount of leverage (debt) used.
aged buyout the
most?
5. How do you pick The same way you would do it anywhere else: you look at what comparable
purchase multi- companies are trading at, and what multiples are similar LBO transaction have
ples and exit mul- been completed at. As always, you show a range of purchase price and exit
tiples in an LBO multiples using sensitivity tables.
model?
Sometimes you can set purchase and exit multiples based on a specific IRR Target
that you are trying to achieve.
6. What is an "ideal" 1. Undervalued
candidate for an 2. Stable and Predictable cash flows
LBO? 3. Low risk business
4. No need for further investments in capex
5. Good Management team
6. The room to cut costs and increase margins
7. Solid base of assets to use as collateral for debt
7. How do you use You use it to value a company by setting a target IRR to achieve and then back-solv-
an LBO model to ing using excel to find what purchase price the PE firm could to pay to achieve the
value a company, IRR. It is called a floor valuation because PE firms always pay less than strategic
and why do we acquirer would.
sometimes say
that it sets the
"floor valuation"
for the company?
2/5
