Exam (elaborations)
LBO Model (Breaking into Wall Street)
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LBO Model (Breaking into Wall Street)
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LBO Model (Breaking into Wall Street)Walk6me6through6a6basic6LBO6model?6-6--1)6Assumptions6of6purchase6price,6debt/
equity6ratio,6interest6rate6on6debt,6and6other6variables6and6you6might6assume6something6
about6company's6revenue6growth6or6margins.62)Create6sources6&6uses6section63)6Adjust
6company's6balance6sheet6for6the6new6debt,6equity,6Goodwill,6and6other6intangibles.64)6P
roject6company's6income6statement,6balance6sheet,6and6cash6flow6statement6and6deter
mine6debt6schedule.65)Assumptions6about6EBITDA6exit6multiple6and6calculate6return6ba
sed6on6how6much6equity6is6returned6to6the6firm
Why6would6you6use6leverage6when6buying6a6company?6-6--
1)6Boost6return,6since6debt6is6not6"your6money".6Easier6to6earn6a6higher6return6on6a6$56bi
l6company6with6$26bil6of6your6money6and6$36bil6than6$36bil6of6your6money6and6$26bil.62)Fi
rm6also6has6more6capital6available6to6purchase6other6companies6because6they've6used6l
everage.
What6variables6impact6an6LBO6model6the6most?6-6--
1)6Purchase6and6exit6multiples6biggest6return62)leverage6used63)operational6characterist
ics6such6as6revenue6growth6and6EBITDA6margins
How6do6you6pick6purchase6multiples6and6exit6multiples6in6an6LBO6model?6-6--
1)Same6as6others,6look6at6comparable6companies6are6trading6at6and6what6multiples6simi
lar6LBO6transactions6have6had.6Sensitivity6analysis6of6purchase6and6exit6multiples.6
2)Sometimes6you6set6purchase6and6exit6multiples6based6on6specific6IRR6target6that6you'
re6trying6to6achieve.
What6is6an6"ideal"6candidate6for6an6LBO?6-6--
1)6Stable6and6predictable6cash6flows62)6low-
risk6businesses63)6low6capex64)6opportunity6for6expense6reductions6to6boost6margins65)
Strong6management6team66)6base6of6assets6to6use6as6a6collateral6for6debt
When6use6LBO6model6for6valuation6and6why6is6it6low?6-6--
Use6it6to6value6a6company6by6setting6a6targeted6IRR6and6then6back-
solving6in6Excel6to6determine6purchase6price6for6PE6firm.6Low6because6PE6firms6almost6
always6pay6less6than6a6strategic6acquirer6would
"Real-Life"6LBO6-6--Common6example;6mortgage6on6a6house.6
a)Down6payment6--6investor6equity6b)Mortgage6--6debt6c)Mortgage6interest6payments6--
6Debt6interest6d)6Mortgage6repayments6--
6debt6principal6repayments6e)6Selling6the6house6--6selling6the6company/taking6it6public
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