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LBO Model 2023/2024 already graded A+
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LBO ModelWhat is an LBO? - ANSAcquisition of another company using significant amount of debt. 90%
debt - 10% equity
Walk me through an LBO model - ANS1. Make assumptions about purchase price, debt/equity
ratio, and interest rate on debt
2. Create a sources/uses section, which shows how the transaction is financed and how much
investor equity is required
3. Adjust balance sheet for new debt/equity figures
4. Project out company's financial performance and determine how much debt would be paid off
each year, based on available cash flow and required interest payments
5. Make assumptions about exit after several years, using EBITDA Exit Multiple
6. Calculate the return based on how much equity is returned to the firm
Why would you leverage when buying a company? - ANSTo boost your return.
- Debt is not your money
- retain more capital to do other things
How do you pick purchase multiples and exit multiples in an LBO model? - ANSLook at what
comparable companies are trading at and what multiples similar LBO transactions have had
What is an "ideal" candidate for an LBO? - ANS- stable Cash flow
- low-risk businesses
- opportunity for expense reductions to boost their margins
- strong management team
How do you use an LBO model to value a company, and why do we sometimes say that it sets
the "floor valuation" for the company? - ANSLBO gives a targeted IRR and then we back-solve
in Excel to determine purchase price could pay to achieve that IRR.
Give an example of a "real-life" LBO - ANSTaking out a mortgage when you buy a house
How is the Balance Sheet adjusted in an LBO? - ANS- New Debt is added on
- Shareholders' Equity is replaced with however much equity the private equity firm contributes
- Cash is adjusted for any cash used
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