LBO Flashcards
What is an LBO
LBO model estimates implied returns from the buyout of a company in which a significant portion of purchase price is funded with debt capital
After a buyout, the firm operates the company and uses the FCF to pay down debt each year
What are the 5 data points to determine in an LBO model
Entry valuation, so pre LBO entry equity and enterprise value
Default risk through credit ratios
FCF, cumulative debt paydown and net debt in exit years
Exit valuation EV MV
And LBO return metrics, IRR and MoM
What are the 5 steps of an LBO
- Entry valuation, estimate implied purchase price
- Compute capital required and sources of funding
- Financial forecast, project post LBO financials and debt schedule
- Exit valuation and returns, approximate the exit equity valuation and IRR MoM
- Sensitivity analysis, assess the impact of the key LBO return drivers
LBO Entry valuation
To calculate enterprise value, entry multiple is multiplied by either the last 12 months (LTM) EBITDA
Entry Valuation = Purchase EBITDA x Entry Multiple
Make assumptions about purchase price, debt to equity ratio, interest rate on debt. Might also assume something about the operations and their respective growth (revenue or mar)
Required capital and schedule
Lower the required upfront equity contribution, the higher the returns.
Compute sources (how we fund) and uses (amount of capital required) to show how you finance the transaction and what you use the capital for. This also shows how much investor equity is required.
Adjust companys balance sheet respectively.
Financial forecast and debt schedule
For LBO model a complete 3 statement model is required to properly impact the income statement and cash flow statement. This is projecting BS, IS, CFS.
The debt schedule is going to track revolver drawdown (pay down), mandatory amortiyation, optional prepayments and computation of interest expense
Determine the amount of debt paid down in each period based on available cash flow.
LBO exit valuation and return schedule (IRR and MOIC)
Exit EV/EBIDTA, conservative assumption is to set the exit multiple equal to purchase multiple and get EV.
Remaining net debt on BS at presumed exit date can be deducted for exit equity value
Sensitivity analysis
We must consider different cases, base, upside and downside. How different assumptions may impact implied returns for the LBO model.
Why leverage when buying a company
This boosts return. Any debt is not your money .
Other capital is also available to purchase other companies.
What impacts LBO the most
Purchase and exit multiples have biggest impact on return of the model
Then leverage amount
Operational characteristics (revenue growth, EBIDTA margins)
How do you pick a multiple
The same way you do it anywhere else: you look at what comparable companies are trading at, and what multiples similar LBO transactions have had. As always, you also show a range of purchase and exit multiples using sensitivity tables.
What is an ideal candidate for an LBO
Stable and predctable cash flows,
opportunity for expense reduction to boost margins,
strong management team,
base of assets to use as collateral
How to you use an LBO to value a companu
You use it by set a target IRR and then back solve the excel to determine what purchase price the PE firm could pay to achieve that IRR
Why do we sometimes sat LBO sets floor valuation
A PE firm will always pay less for a firm than a strategic acquirer would, based on interest
Real life LBO
A mortgage on your house
Downpayment is your investor equity
Mortgage is the debt
Mortgage interest payments is debt interest
Mortgage repazments is debt principal repazments
Selling the house if youtr exit
