What is an LBO Model?
A Leveraged Buyout (LBO) model is a financial analysis used to assess the acquisition of a company using a significant amount of debt. The objective is to maximize returns for equity investors by leveraging the purchase, which enhances potential gains but also increases financial risk.
Modelling an LBO is vital prior to a deal as the potential buyer will need to service the deal debt from cash flows generated from the company. It is likely that the deal will rely on using assets in the company as debt collateral which also needs assessing.
LBO analysts will calculate the potential IRR of the deal and assess whether it is attractive and viable relative to the risk involved. Investors will want to maximise the return on the equity investment, typically an IRR of over 20%.
Download the LBO Template from the free resources section to enable modelling LBO scenarios and perform sensitivity analysis.
LBO Model Template – Key Inputs
Use this model to complete the calculations for the given data and explore potential returns from a debt-financed acquisition. It can be used to model alternative companies and create multiple scenarios for detailed LBO analysis.
Assumptions:
- Acquisition Cost: determine the purchase price and potential exit value
- Purchase price: must consider all options and share classes
- Acquisition cost: based on entry multiple, LTM EBITDA and company debt
- Exit Assumptions: based on exit multiple and exit year
- Financing Structure: decide on the mix of debt and equity, interest rates, and associated fees
- Operational Assumptions: forecast revenue growth, EBITDA margins and working capital needs
Sources and Uses of Funds:
- Sources: identify the debt and equity components used to finance the transaction
- Uses: allocate funds to the purchase price, refinancing existing debt, transaction fees, and any capital expenditures
Financial Projections:
- Income Statement: project revenue, expenses, EBITDA, and net income over the investment period
- Balance Sheet: include projections for assets, liabilities, and equity, adjusting for the new capital structure
- Cash Flow Statement: focus on free cash flow, as this will be used to pay down debt over time
Debt Schedule:
- Repayment Plan: outline the timeline for paying down the various tranches of debt, utilizing excess cash flow generated by the business
- Interest Expense: calculate the interest costs associated with each debt tranche and its impact on net income
Model Outputs:
- IRR (Internal Rate of Return): estimate the return on equity investment by calculating the IRR based on projected cash flows and the expected exit value
- Debt Metrics: track key metrics like Debt/EBITDA and Interest Coverage Ratios to assess the financial health and risk of the transaction
- Equity Returns: evaluate the multiple of equity (MOE) and compare it against the target returns
Steps for Using the LBO Model Template
- Set Up the Model: input all relevant assumptions related to acquisition price, financing mix, and operational performance
- Build Financial Statements: develop pro forma income statement, balance sheet and cash flow statement to forecast the company’s performance
- Create a Detailed Debt Schedule: structure the debt repayments, including interest expenses and principal payments, based on the company’s cash flow
- Analyze Model Outputs: calculate key metrics including IRR, equity multiple, and debt ratios to determine the viability and attractiveness of the LBO
- Perform Sensitivity Analysis: adjust key assumptions to understand how changes in variables like purchase price, exit multiple, or EBITDA growth impact the overall returns
What You’ll Get with the LBO Model Template
- Detailed Financial Analysis: a comprehensive breakdown of the financial impact of the leveraged buyout
- Debt Management Insights: clear understanding of how the debt burden affects cash flow and financial health
- Return Projections: estimates of the potential returns to equity investors, helping assess the attractiveness of the deal
Risk Assessment: evaluate financial risks associated with leverage, including sensitivity to changes in key assumptions