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Simple LBO Model

Step-by-Step Guide to Understanding the Simple LBO Model

Last Updated December 6, 2023

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Simple LBO Model: Video Tutorial

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.

Simple LBO Model – Excel Template

Use the form below to download the Excel template that goes along with the simple LBO model video series.

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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)

Additional LBO Resources

We hope you found this video tutorial. If these videos made sense, you have a basic foundation for delving deeper into the more complicated mechanics of an LBO Model.

If you are preparing for private equity interviews, below are additional tutorials to show you exactly how private equity firms test your LBO knowledge via interview questions and modeling tests:

  1. Top 25 Private Equity Interview Questions – Baseline knowledge around the technical aspects you’ll be expected to know in PE interviews.
  2. Paper LBO Test – Given at earlier rounds, you’ll get a pen and paper (no calculator) and 5–10 minutes
  3. Basic LBO Modeling Test – You’re given a laptop, simple instructions and ~30 minutes – this serves as a slightly more robust early-round screen than the Paper LBO
  4. Standard LBO Modeling Test – You’re given a laptop and 1–2 hours. This is the most common LBO Modeling Test given at lower-middle market and middle-market PE firms.
  5. Advanced LBO Modeling Test – You’re given a Laptop, a 5-15 page packet of financial data, and 3–4 hours. You’re most likely to see this from upper-middle market firms or mega-funds in the later rounds of the interview process.

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Question
December 8, 2021 3:18 pm

The equity value upon exit is less than its current market cap and we would be paying a premium. Why would you do this?

Jeff Schmidt
December 8, 2021 5:41 pm
Reply to  Question

Elliott:

The equity investors are only putting in 6,080 to buy this company. At exit the equity value is 14,844 which represents a 33% IRR. This is a very good return and is an example of how an LBO can be profitable for equity investors.

Best,
Jeff

Liability
December 15, 2020 2:49 pm

I don’t understand the pre-deal information, transaction and exit year
assumptions for CVS in the LBO primer. Can you explain it to me? Thank you.

Jeff Schmidt
December 15, 2020 6:09 pm
Reply to  Liability

What is you don’t understand? These are all general assumptions in our model.

Best,
Jeff

Michael
July 14, 2020 10:27 pm

In the second video, at the time between 3:55 – 3:56, what is the shortcut you used to fill in all the blanks to the right?

Jeff Schmidt
July 15, 2020 7:58 am
Reply to  Michael

Michael:

I was using the Macabacus add-in and pressing Ctrl Shift R. Macabacus calls it “Fast Fill.”

Best,
Jeff

shane
December 24, 2019 12:28 am

Hi, could you explain why Enterprise value in the exit year is equivalent to EBITDA * EBITDA multiple (6.5x); arent Enterprise Value and EBITDA two different values?

Jeff Schmidt
December 25, 2019 2:00 pm
Reply to  shane

Shane:

Yes, they are two different values. The EBITDA multiple is the ratio of Enterprise Value to EBITDA. Taking that number and multiplying it by EBITDA gives you enterprise value.

Best,
Jeff

Tony
November 23, 2019 8:09 am

Hi for “LBO debt, beginning of period” for 2013, should it be 14,500? Because your net debt/EBITDA(debt capacity) multiple times LTM EBITDA gives net debt for LBO which is 14,400. Now to get LBO debt you need to add the current cash 100. Or am I wrong with any calculation?

Jeff Schmidt
November 25, 2019 1:11 pm
Reply to  Tony

Tony:

No, I think the LBO debt capacity of 6x should be relabeled to say Debt/EBITDA for better clarity. Thanks for pointing this out.

Best,
Jeff

Curious Learner
October 17, 2019 10:41 pm

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

Jeff Schmidt
October 22, 2019 12:42 pm

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
October 28, 2019 9:34 am
Reply to  Jeff Schmidt

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 Schmidt
October 28, 2019 3:16 pm
Reply to  Augustin

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
October 29, 2019 6:45 am
Reply to  Jeff Schmidt

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 Schmidt
October 31, 2019 12:04 pm
Reply to  Augustin

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
July 28, 2019 9:07 am

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 Schmidt
July 29, 2019 3:12 pm
Reply to  Jay

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
August 15, 2019 9:29 am
Reply to  Jeff Schmidt

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 Schmidt
August 15, 2019 10:34 am
Reply to  Jonathan

Jonathan:

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

Best,
Jeff

Jonathan
August 15, 2019 10:52 am
Reply to  Jeff Schmidt

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 Schmidt
August 15, 2019 8:08 pm
Reply to  Jonathan

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
January 18, 2019 12:42 am

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

Haseeb Chowdhry
January 29, 2019 2:25 pm
Reply to  Nirvan

Awesome – spread the word Nirvan!

Elizabeth Alexander
October 5, 2018 12:38 pm

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

Haseeb Chowdhry
October 7, 2018 10:39 pm

Elizabeth,

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

Cezary
April 27, 2018 3:30 pm

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
April 30, 2018 1:51 pm
Reply to  Cezary

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
February 4, 2017 4:00 pm

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
February 6, 2017 6:35 pm
Reply to  Joe

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
April 20, 2016 1:25 am

B:16 Free cash flows after debt paydown

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

sadin
April 20, 2016 12:55 am

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 Wilson
April 25, 2016 3:12 am
Reply to  sadin

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
April 25, 2016 3:21 am
Reply to  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
May 30, 2015 8:52 am

Hi,

Does this LBO works for everyone?

Haseeb Chowdhry
June 1, 2015 10:20 am
Reply to  Dennis Limbo

Dennis,

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

Warren
March 26, 2015 5:21 am

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
March 26, 2015 8:14 pm
Reply to  Warren

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
January 4, 2015 12:03 am

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
January 13, 2015 10:25 pm
Reply to  AB

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 »

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