LBOs - Second Round Flashcards
Walk me through an LBO model.
Step 1: Make assumptions about purchase price, debt/equity ratio, interest rate on debt and other variables such as revenue growth or margins, depending on how much info is given.
Step 2: Create a Sources & Uses section showing how to transaction will be financed. This will also show how much investor equity is required.
Step 3: Adjust the company’s Balance sheet for the new Debt and Equity figures, and add in Goodwill and Other Intangibles on the Assets side to make everything balance.
Step 4: Project out the company’s Income Statement, Balance Sheet and Cash Flow Statement, and determine how much debt is paid off each year, based on the available Cash Flow and required Interest Payments.
Step 5: Make assumptions about the exit after several years, usually assuming an EBITDA multiple. Calculate return based on how much equity is returned to the firm.
Why would you use leverage when buying a company?
To boost your return. Debt is not “your money” so you get a higher return on the money you invest. Firm also has more capital freed up.
What variables impact an LBO model the most?
Purchase and exit multiples have the biggest impact on the returns of a model. After that, the amount of leverage (debt) used also
