Wall Street Prep

Quick Lesson: Simple LBO Model

In this video tutorial, we'll build a leveraged buyout (LBO) model, given some operating and valuation assumptions, in Excel. The goal of this video is to show you that an LBO model is actually a very simple transaction at its core - and quite similar to the mechanics involved when purchasing a home. If after watching this video you want to take your LBO modeling to the next level, see Wall Street Prep's advanced LBO modeling course.

Note: To download the Excel template that goes with this video, click here

Building a Simple LBO Model  - Video 1 of 3

Building a Simple LBO Model  - Video 2 of 3

Building a Simple LBO Model  - Video 3 of 3

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Nirvan
Nirvan

The videos were really helpful in understanding the math behind LBOs. Thank you for making such videos.

Haseeb Chowdhry
Haseeb Chowdhry

Awesome - spread the word Nirvan!

Elizabeth Alexander
Elizabeth Alexander

What is FCF after debt paydown? Is that Operating CF - Inv in PPE - debt principal repayments?

Haseeb Chowdhry
Haseeb Chowdhry

Elizabeth,

It would be CFO - CFI - Debt Repayment. Hope this helps - thanks!

Cezary
Cezary

Hi All,
I have a question on exit date: why the investor assumes it sells Target after 5 years? What will the investor do if the market is still avourable after this 5years. Will he stay with its investment in Target or sells irrespectively of good market conditions?

Haseeb Chowdhry
Haseeb Chowdhry

Cezary,

The 5-year horizon is the typical template structure we use to teach, but various PE firms will re-assess opportunities at any significant juncture. If a PE investment can yield significant return in 3 years, the PE firm will be opportunistic. A lot of consideration goes into market conditions, portfolio performance, returning capital to LPs, etc. Hope this helps give you a flavor for the answer. The long and short of it: it depends! 🙂

Joe
Joe

Hi

Why do we not take into account the opening debt (cell 42) in the debt schedule? We do appear to take into account the opening cash, so it seems inconsistent that we don't take into account opening debt?

Thank you for a great tutorial!

Haseeb Chowdhry
Haseeb Chowdhry

Joe - the LBO entails that you raise all new debt facilities to replace the old debt - you have a new, highly leveraged capital structure - hope this helps!

sadin
sadin

B:16 Free cash flows after debt paydown

net operating cash flow minus net capital expenditures minus minus debt payment plus raise debt?

sadin
sadin

Hi!

B:9 Current Debt, what kind of Debt we should put here? The whole company liability (assets minus capital) or only debt from banks, bonds etc interest debt?

If we are going to buyout a company, the price is 6 times EBITDA - 10M. 20% will be funded by our own source - $2M, and $ 8M from the bank. How I should made this adjustments?

Thanks for a really great and usefull model!

Shannan Wilson
Shannan Wilson

Hi Sadin,
1) Debt is normally considered to be liabilities that are interest bearing, contractual liabilities (so yes, debt from banks, bonds, etc.).
2) This is a simple LBO model, our more advanced model to allow for such tweaks can be found in our Advanced LBO Modeling Course (https://www.wallstreetprep.com/self-study-programs/adv-lbo-modeling/).
Shannan

Shannan Wilson
Shannan Wilson

Hi Sachin,
This would typically be defined as CFO + CFI - required debt principal payments - preferred cash dividends.
I hope this helps!
Shannan

Dennis Limbo
Dennis Limbo

Hi,

Does this LBO works for everyone?

Haseeb Chowdhry
Haseeb Chowdhry

Dennis,

As with any LBO - you will have to make company-by-company adjustments, but overall it is a solid start.

Warren
Warren

When I calculate the exit multiple of 6.5x times the EBITDA in 2016 of 3,513.8, I get 22,840, not 22,696 as you show in this video. What did I do incorrectly?

Haseeb Chowdhry
Haseeb Chowdhry

Warren,

Check if you calculated your revenues / EBITDA correctly - ensure they match up to the completed tab. Let me know if you've resolved this - thanks.

Haseeb

AB
AB

After Video 2, where do we see the deduction in cash/FCF after the REQUIRED debt pay down? I say this for the formula in cash (row 41) - why isn't cash deducted another 1,000? Where is the 1,000 required pay down coming from? Thanks!

Haseeb Chowdhry
Haseeb Chowdhry

The 1,000 deducted per year is our assumption as stated in the beginning part of video 2. The formula in row 41 depends on the formula in row 50 which calculates the options repayment in the year AFTER the 1000 has been paid mandatorily. The deduction in cash/FCF after the required debt paydown is implicit - it's captured in the line item in line 38 - free cash flow available after required debt paydown of 1,000 - which again is our assumption.

X

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