LBO model – Leveraged Buyout Financial
Modeling Study Guide & Certification Review
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Terms in this set (91)
In a leveraged buyout (LBO), a private equity (PE) firm
acquires a company using Debt and Equity, operates
What is a leveraged
it, and sells it later to realize a return. Leverage
buyout, and why does it
amplifies returns by using borrowed money, which
work?
increases profits if the deal performs well. However, it
also increases risk if the deal underperforms.
Leverage amplifies returns by reducing the amount of
2. Why do PE firms use Equity the PE firm uses. If the deal goes well, returns
leverage when buying are enhanced; if it fails, losses are magnified.
companies? Leverage also allows PE firms to spread their capital
across multiple deals.
1. Make assumptions about Purchase Price,
Debt/Equity, Interest Rates, and company growth. 2.
Create a Sources & Uses schedule showing financing
3. Walk me through a basic and capital needs. 3. Project the Income Statement
LBO model. and Free Cash Flow. 4. Use Free Cash Flow to repay
Debt and calculate Interest. 5. Calculate the exit
value, IRR, and MoM based on EBITDA Exit Multiples
and Debt repayment.
, The PE firm creates a holding company that acquires
4. Can you explain the
the target. Debt is held by the holding company,
legal structure of an LBO
limiting the PE firm's liability. This structure shields the
and why it benefits PE
PE firm from directly assuming the Debt; the acquired
firms?
company is responsible for repayment.
The Purchase and Exit Multiples have the biggest
impact. More Debt enhances returns if the deal
5. What assumptions
performs well. Growth, EBITDA margins, and cash
impact an LBO the most?
flow also affect performance. Interest rates and
repayment schedules matter but are less significant.
6. How do you select Use share price premiums (for public companies),
Purchase and Exit comparables, precedent transactions, and DCF
Multiples in an LBO analysis. Exit Multiples are typically similar to Purchase
model? Multiples, with sensitivity analysis for variability.
Ideal candidates have stable cash flows, low CapEx
needs, high margins, and opportunities for growth or
7. What is an "ideal" LBO
cost reduction. A strong asset base, minimal
candidate?
competition, and a solid management team also
improve LBO potential.
Set a target IRR (e.g., 25%) and use Goal Seek to
8. How do you use an LBO
calculate the maximum price a PE firm could pay to
model to value a
achieve that IRR. This valuation is a "floor" because it
company, and why is it a
reflects the minimum the firm needs for a viable
"floor valuation"?
return.
A DCF values a company based on projected future
9. How is an LBO valuation
cash flows, while an LBO values it based on achieving
different from a DCF
a targeted IRR. LBOs focus on maximizing returns by
valuation?
limiting the purchase price.
LBOs assume the company will be sold in 3-7 years.
10. How is an LBO different IRR and MoM are key metrics. LBOs use Debt and
from a normal M&A deal? Equity, while strategic M&A deals use Cash, Debt, or
Stock. Synergies are irrelevant in LBOs.
Modeling Study Guide & Certification Review
Save
Terms in this set (91)
In a leveraged buyout (LBO), a private equity (PE) firm
acquires a company using Debt and Equity, operates
What is a leveraged
it, and sells it later to realize a return. Leverage
buyout, and why does it
amplifies returns by using borrowed money, which
work?
increases profits if the deal performs well. However, it
also increases risk if the deal underperforms.
Leverage amplifies returns by reducing the amount of
2. Why do PE firms use Equity the PE firm uses. If the deal goes well, returns
leverage when buying are enhanced; if it fails, losses are magnified.
companies? Leverage also allows PE firms to spread their capital
across multiple deals.
1. Make assumptions about Purchase Price,
Debt/Equity, Interest Rates, and company growth. 2.
Create a Sources & Uses schedule showing financing
3. Walk me through a basic and capital needs. 3. Project the Income Statement
LBO model. and Free Cash Flow. 4. Use Free Cash Flow to repay
Debt and calculate Interest. 5. Calculate the exit
value, IRR, and MoM based on EBITDA Exit Multiples
and Debt repayment.
, The PE firm creates a holding company that acquires
4. Can you explain the
the target. Debt is held by the holding company,
legal structure of an LBO
limiting the PE firm's liability. This structure shields the
and why it benefits PE
PE firm from directly assuming the Debt; the acquired
firms?
company is responsible for repayment.
The Purchase and Exit Multiples have the biggest
impact. More Debt enhances returns if the deal
5. What assumptions
performs well. Growth, EBITDA margins, and cash
impact an LBO the most?
flow also affect performance. Interest rates and
repayment schedules matter but are less significant.
6. How do you select Use share price premiums (for public companies),
Purchase and Exit comparables, precedent transactions, and DCF
Multiples in an LBO analysis. Exit Multiples are typically similar to Purchase
model? Multiples, with sensitivity analysis for variability.
Ideal candidates have stable cash flows, low CapEx
needs, high margins, and opportunities for growth or
7. What is an "ideal" LBO
cost reduction. A strong asset base, minimal
candidate?
competition, and a solid management team also
improve LBO potential.
Set a target IRR (e.g., 25%) and use Goal Seek to
8. How do you use an LBO
calculate the maximum price a PE firm could pay to
model to value a
achieve that IRR. This valuation is a "floor" because it
company, and why is it a
reflects the minimum the firm needs for a viable
"floor valuation"?
return.
A DCF values a company based on projected future
9. How is an LBO valuation
cash flows, while an LBO values it based on achieving
different from a DCF
a targeted IRR. LBOs focus on maximizing returns by
valuation?
limiting the purchase price.
LBOs assume the company will be sold in 3-7 years.
10. How is an LBO different IRR and MoM are key metrics. LBOs use Debt and
from a normal M&A deal? Equity, while strategic M&A deals use Cash, Debt, or
Stock. Synergies are irrelevant in LBOs.
