LBO Model (Breaking into Wall Street)
Walk me through a basic LBO model? - ANS1) Assumptions of purchase price, debt/equity ratio,
interest rate on debt, and other variables and you might assume something about company's
revenue growth or margins. 2)Create sources & uses section 3) Adjust company's balance
sheet for the new debt, equity, Goodwill, and other intangibles. 4) Project company's income
statement, balance sheet, and cash flow statement and determine debt schedule.
5)Assumptions about EBITDA exit multiple and calculate return based on how much equity is
returned to the firm
Why would you use leverage when buying a company? - ANS1) Boost return, since debt is not
"your money". Easier to earn a higher return on a $5 bil company with $2 bil of your money and
$3 bil than $3 bil of your money and $2 bil. 2)Firm also has more capital available to purchase
other companies because they've used leverage.
What variables impact an LBO model the most? - ANS1) Purchase and exit multiples biggest
return 2)leverage used 3)operational characteristics such as revenue growth and EBITDA
margins
How do you pick purchase multiples and exit multiples in an LBO model? - ANS1)Same as
others, look at comparable companies are trading at and what multiples similar LBO
transactions have had. Sensitivity analysis of purchase and exit multiples.
2)Sometimes you set purchase and exit multiples based on specific IRR target that you're trying
to achieve.
What is an "ideal" candidate for an LBO? - ANS1) Stable and predictable cash flows 2) low-risk
businesses 3) low capex 4) opportunity for expense reductions to boost margins 5)Strong
management team 6) base of assets to use as a collateral for debt
When use LBO model for valuation and why is it low? - ANSUse it to value a company by
setting a targeted IRR and then back-solving in Excel to determine purchase price for PE firm.
Low because PE firms almost always pay less than a strategic acquirer would
"Real-Life" LBO - ANSCommon example; mortgage on a house.
a)Down payment -- investor equity b)Mortgage -- debt c)Mortgage interest payments -- Debt
interest d) Mortgage repayments -- debt principal repayments e) Selling the house -- selling the
company/taking it public
Can you explain how the Balance Sheet is adjusted in an LBO model? - ANSLiabilities &
Equities: +new debt. Shareholder's equity is reset based on how much equity the acquirer is
contributing.
Walk me through a basic LBO model? - ANS1) Assumptions of purchase price, debt/equity ratio,
interest rate on debt, and other variables and you might assume something about company's
revenue growth or margins. 2)Create sources & uses section 3) Adjust company's balance
sheet for the new debt, equity, Goodwill, and other intangibles. 4) Project company's income
statement, balance sheet, and cash flow statement and determine debt schedule.
5)Assumptions about EBITDA exit multiple and calculate return based on how much equity is
returned to the firm
Why would you use leverage when buying a company? - ANS1) Boost return, since debt is not
"your money". Easier to earn a higher return on a $5 bil company with $2 bil of your money and
$3 bil than $3 bil of your money and $2 bil. 2)Firm also has more capital available to purchase
other companies because they've used leverage.
What variables impact an LBO model the most? - ANS1) Purchase and exit multiples biggest
return 2)leverage used 3)operational characteristics such as revenue growth and EBITDA
margins
How do you pick purchase multiples and exit multiples in an LBO model? - ANS1)Same as
others, look at comparable companies are trading at and what multiples similar LBO
transactions have had. Sensitivity analysis of purchase and exit multiples.
2)Sometimes you set purchase and exit multiples based on specific IRR target that you're trying
to achieve.
What is an "ideal" candidate for an LBO? - ANS1) Stable and predictable cash flows 2) low-risk
businesses 3) low capex 4) opportunity for expense reductions to boost margins 5)Strong
management team 6) base of assets to use as a collateral for debt
When use LBO model for valuation and why is it low? - ANSUse it to value a company by
setting a targeted IRR and then back-solving in Excel to determine purchase price for PE firm.
Low because PE firms almost always pay less than a strategic acquirer would
"Real-Life" LBO - ANSCommon example; mortgage on a house.
a)Down payment -- investor equity b)Mortgage -- debt c)Mortgage interest payments -- Debt
interest d) Mortgage repayments -- debt principal repayments e) Selling the house -- selling the
company/taking it public
Can you explain how the Balance Sheet is adjusted in an LBO model? - ANSLiabilities &
Equities: +new debt. Shareholder's equity is reset based on how much equity the acquirer is
contributing.
