LBO Theory & Modeling Exam Review 2024/2025
Leveraged Buyout (LBO) (4) - Answer-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
...
LBO Theory & Modeling Exam Review 2024/2025
Leveraged Buyout (LBO) (4) - Answer-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
Why LBOs Work (3) - Answer-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
LBO Value Creation Strategies (3) - Answer-1. Deleveraging
- As debt reduced, equity value increases
,2. Operational Improvements
- Enhanced operating cash flows through productivity / efficiency gains
3. Multiple Expansion
- Market-driven
Ways to Increase Returns (3) - Answer-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
,Ways to Change IRR (2) - Answer-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
Purposes of LBO (4) - Answer-1. Determine FAIR VALUATION for company (including ability-to-pay
analysis)
2. Determine EQUITY RETURNS (IRR)
, 3. Determine effect of RECAPITALIZING through issuance of debt to replace equity
4. Determining DEBT SERVICE LIMITATIONS of target from its cash flows
LBO Transaction Constituents (3) - Answer-1. Target Company
- Determine how much debt is paid down each year (LFCF)
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