LBO Theory & Modeling Final Exam
1. Acquisition of a public or private company with a significant amount DEBT
- Debt 60 - 75% of purchase price
2. LBO model is an analysis that projects returns of a potential investment by making
assumptions on valuation, forecasted financials, and deal structure
3. Project out 3 -statements to determine how much cash used to PAY DOWN outstanding debt
during ownership
4. Return (IRR / MoC) determined by...
i.) Terminal EBITDA
ii.) Exit Multiple
iii.) Debt Outstanding (Total Debt - Total Debt Repaid)
Exit Equity Value = (Terminal EBITDA x Exit Multiple) - Debt Outstanding - answers✔✔Leveraged
Buyout (LBO) (4)
1. Reduce UPFRONT CASH PAYMENT for company, which increases returns
2. Using cash flows to REPAY DEBT principal and interest produces BETTER RETURN than keeping
cash flow (DISPROPORTIONATE EFFECT due to TVM)
,3. SELL COMPANY in future, which allows you to regain majority of cost used to acquire -
answers✔✔Why LBOs Work (3)
1. Deleveraging
- As debt reduced, equity value increases
2. Operational Improvements
- Enhanced operating cash flows through productivity / efficiency gains
3. Multiple Expansion
- Market-driven - answers✔✔LBO Value Creation Strategies (3)
1. EBITDA Growth
i.) Higher Revenue
ii.) Lower Costs
iii.) Accretive Acquisitions
2. Raising Debt and Paydown
i.) More Debt
ii.) Lower Capex
3. Multiple Expansion
i.) Higher Exit Multiple (e.g. building higher quality business, investing in markets that will
improve)
4. Others
i.) Lower Purchase Price
, ii.) Lower Interest Rates
Anything that BOOSTS cash flows - answers✔✔Ways to Increase Returns (3)
1. Increase IRR
A. Receiving Cash Flows EARLIER
i.) Dividend Recap
ii.) Cash Interest
iii.) Earlier Sale
B. Increasing SIZE of Cash Flows
i.) Growing EBITDA
ii.) Selling Company for Higher Multiple
2. Decrease IRR
A. Receiving Cash Flows LATER
i.) Opting for PIK Interest
ii.) Delaying Sale or IPO
iii.) Lockups on Shares
B. Decreasing SIZE of Cash Flows
i.) Diluting Equity
ii.) Business Performs Worse
iii.) Tax Increases - answers✔✔Ways to Change IRR (2)
1. Determine FAIR VALUATION for company (including ability-to-pay analysis)
1. Acquisition of a public or private company with a significant amount DEBT
- Debt 60 - 75% of purchase price
2. LBO model is an analysis that projects returns of a potential investment by making
assumptions on valuation, forecasted financials, and deal structure
3. Project out 3 -statements to determine how much cash used to PAY DOWN outstanding debt
during ownership
4. Return (IRR / MoC) determined by...
i.) Terminal EBITDA
ii.) Exit Multiple
iii.) Debt Outstanding (Total Debt - Total Debt Repaid)
Exit Equity Value = (Terminal EBITDA x Exit Multiple) - Debt Outstanding - answers✔✔Leveraged
Buyout (LBO) (4)
1. Reduce UPFRONT CASH PAYMENT for company, which increases returns
2. Using cash flows to REPAY DEBT principal and interest produces BETTER RETURN than keeping
cash flow (DISPROPORTIONATE EFFECT due to TVM)
,3. SELL COMPANY in future, which allows you to regain majority of cost used to acquire -
answers✔✔Why LBOs Work (3)
1. Deleveraging
- As debt reduced, equity value increases
2. Operational Improvements
- Enhanced operating cash flows through productivity / efficiency gains
3. Multiple Expansion
- Market-driven - answers✔✔LBO Value Creation Strategies (3)
1. EBITDA Growth
i.) Higher Revenue
ii.) Lower Costs
iii.) Accretive Acquisitions
2. Raising Debt and Paydown
i.) More Debt
ii.) Lower Capex
3. Multiple Expansion
i.) Higher Exit Multiple (e.g. building higher quality business, investing in markets that will
improve)
4. Others
i.) Lower Purchase Price
, ii.) Lower Interest Rates
Anything that BOOSTS cash flows - answers✔✔Ways to Increase Returns (3)
1. Increase IRR
A. Receiving Cash Flows EARLIER
i.) Dividend Recap
ii.) Cash Interest
iii.) Earlier Sale
B. Increasing SIZE of Cash Flows
i.) Growing EBITDA
ii.) Selling Company for Higher Multiple
2. Decrease IRR
A. Receiving Cash Flows LATER
i.) Opting for PIK Interest
ii.) Delaying Sale or IPO
iii.) Lockups on Shares
B. Decreasing SIZE of Cash Flows
i.) Diluting Equity
ii.) Business Performs Worse
iii.) Tax Increases - answers✔✔Ways to Change IRR (2)
1. Determine FAIR VALUATION for company (including ability-to-pay analysis)
