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

Comments

30
Leave a Reply

avatar
newest oldest most voted
Curious Learner
Curious Learner

For Cash we added, prior cash ($100)+ additional from projection periods. However, we did not add prior debt of $600to 2012 debt, why?

Jeff
Jeff

Curious:

Did you mean why did we not add the $600 million in pre-LBO debt to 2013 (you wrote 2012)? It's because the $600 million in pre-LBO debt would be refinanced at LBO close.

Best,
Jeff

Augustin
Augustin

I believe the question is more the following: (i) The financial sponsor has this $20,480m to propose a purchase price to the current shareholders of XYZ: $14,400m of debt and $6,080m of its own cash. Maybe, this cash will go to a SPV that will acquire the company XYZ. (ii)… Read more »

Jeff
Jeff

Augustin: If you are referring to the cash being $100 in cell C41 then that is the last actual cash balance before the acquisition (2012A). The buyer only requires $50 of cash so the new debt/equity will buyout the existing shareholders and pay off the $600 cash balance, along with… Read more »

Augustin
Augustin

Thank you very much for your answer. It is still not clear for me. If the acquirer buy this the company XYZ for $19,980m ($20,480m - $500m) or c. $39 per share, the maximum that it can pay for 25% return. This cash is going to fully go to the… Read more »

Jeff
Jeff

Augustin: The maximum the PE firm can put in is actually 6,080. The rest of the proceeds (14,400) comes from debt. The shareholders get the bulk of the proceeds since there isn't much existing debt that needs to be paid down ($39.36 per share). There is no SPV involved here:… Read more »

Jay
Jay

Hi, Isn't it wrong to include the 100 in Cash (cell C41) in the optional paydown for 2013 (cell D50)? The model implies that the cash balance initially on the company's balance sheet are being used to pay down the debt, when the LBO is first carried out (thereby reducing… Read more »

Jeff
Jeff

Jay: We pay $15,500 for the business, which includes $100 of cash that we obtain use of. Given our assumption of a minimum cash balance of $50, we can use the remaining $50 plus the $528 in free cash flow after required debt paydown to support our optional paydown. The… Read more »

Jonathan
Jonathan

Hi,
so that means that all the multiples stated are INCL. any transaction fees and min. cash? For some other practice cases, multiples are stated before financing and min. cash. How do I know when these need to be added to the total transaction value and when not?
Thanks

Jeff
Jeff

Jonathan:

No, multiples do not include transaction fees. Where do you see that?

Best,
Jeff

Jonathan
Jonathan

I saw that in a different case example they use the following items when calculating the sources & uses section. For Uses, they show: Minimum Cash Purchase Price Fees and Expenses Then you can get a multiple for the total uses which includes all 3 components. Is this at all… Read more »

Jeff
Jeff

Jonathan: We're talking apples and oranges. Multiples are usually quoted as the takeover multiple, say 5x EBITDA, which does not include fees. However, sources and uses schedules do contain fees and cash balances but I don't recall seeing a multiple restated to include transaction fees (that just could be my… Read more »

Nirvan
Nirvan

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

Haseeb
Haseeb

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
Haseeb

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
Haseeb

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… Read more »

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
Haseeb

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… Read more »

Shannan
Shannan

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
Shannan

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
Haseeb

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
Haseeb

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
Haseeb

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… Read more »

X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.