LBO Model Qs

Question 1

Wal me through LBO model

Answer 1

• make assumptions for purchase price, debt, equity, interest rate on debt and others eg. rev growth and margins
• create S&U to show how much investor equity PE contributes and how transaction fees and co’s cash balance affect contribution
• project co’s IS and partial CFS down to free cash flow
• use FCF, beginning cash, min cash to determine how much debt principal co replays every year
• link interest expense on changing debt balance to IS so FCF deducts interest
• make exit calcs, assume an EBITDA mult- calc IRR MoM mult based on proceeds PE firm earns at end vs investor equity in the beginning

Question 2

How would u choose capstr

Answer 2

• maximize debt financing
• make sure firm doesn’t exceed leverage thresholds

Question 3

What assumptions impact LBO the most?

Answer 3

• purchase price and exit assumptions
• amt of debt used
• co’s rev growth, EBITDA margins, cash flow profile

Question 4

How do purchase price and exit assumptions impact LBO?

Answer 4

A lower Purchase Multiple results in higher returns, and a higher Exit Multiple results in higher returns.

Question 5

how does amt of debt used impact LBO?

Answer 5

leverage can amplify returns

Question 6

How do co’s rev growth, EBITDA margins, cash flow profile impact LBO?

Answer 6

influence the exit calculations and the Debt repaid in the holding period.

Question 7

How do you select the Purchase Multiples and Exit Multiples in an LBO model?

Answer 7

public cos purchase mult
- premium to co’s current share price
- check implied purchase mult against val to see if reasonable

Private cos purchase mult
- compraable cos, precedent transactions, DCF

Exit mult
- could go higher or lower dep on growth rate and ROIC on exit

analyse transaction via sensitivity tables w range of mults

Question 8

Why is historical interest expense not meaningful when building LBO model?

Answer 8

irrelevant b/c target will be recapitalized

Question 9

LBO vs DCF

Answer 9

• both based on cash flows

Diff
- LBO: constraining values based on target IRRs or mults

Question 10

LBO vs M&A

Answer 10

LBO
- co sold after 3-7 year holding period
- focus on IRR, MoM as key metrics
- only use debt & cash
- may back into purchase price based on targeted IRR

M&A
- can use cash debt stock
- synergies, accretion dilution matter

Question 11

What are the main drivers of PE returns?

Answer 11

• multiple expansion
• EBITDA growth
• debt paydown and cash generation

Question 12

How can PE firm boost returns?

Answer 12

• reduce purchase mult and increase exit mult
• increase ebitda by increase rev or cut ex
• use more debt to fund deal
• improve cash flow by cutting capex and wc