Lbo Model

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Leveraged Buyout Model
(LBO)

Copyright 2009 Investment Banking Institute

www.ibtraining.com

Table of Contents
I. Uses for An LBO Model on Sell-side and Buy-side
Construction of LBO Model Structure and Assumptions Worksheet Purchase price calculation and considerations
Sources and Uses
II.
Capital Structure Alternatives
Integration of Proforma Balance Sheet into Financial Model
Income Statement, Balance Sheet and Cash Flow
Projections Integration
III. IRR Analysis for Financial Sponsor and Hybrid Debt Lender IV. Sensitivity Tables
V. Credit Ratios

2

Uses for an LBO Model on the Buy-Side
A Leveraged Buyout Model (“LBO Model”) is a key analysis used by private equity firms / financial sponsors to evaluate a potential acquisition The goal of an LBO is to acquire a company by financing the purchase with as much debt as the cash flows of the business and the debt markets will support The more debt a financial sponsor is able to obtain to finance an acquisition, the less of an equity investment the financial sponsor has to make The higher the leverage levels, the higher the expected Internal Rate of Return (“IRR”) is for the financial sponsor / private equity firm The goal of an LBO model is to establish expected internal rates of return (“IRR”) for the acquisition using a financial model that reflects the following: Purchase price assumptions and the necessary cash needed to finance the acquisition (uses of cash)

Capitalization assumptions: leverage (amount of debt), different debt tranches, equity investment amounts (sources of cash)
Base case financial projections for the income statement, balance sheet and cash flow based upon the purchase price and capitalization assumptions

The LBO model should be built with the ability to run sensitivities for a range of purchase prices, capitalization structures, operating assumptions, etc.

3

Uses for an LBO Model on the Buy-Side
Private Equity Firms / Financial Sponsors usually have a required rate of return hurdle
if the expected IRR range for a potential acquisition does not meet or exceed the hurdle rate, often the PE firm / financial sponsor does not move forward with the acquisition
PE firms required rates of return usually range from 15% on the low-side to 30% on the high-side, with the typical range targeted at 18% - 25%

The IRR analysis is strongly driven by the amount of leverage With higher leverage levels, the financial sponsor has to invest less equity, and therefore has a higher IRR
Therefore, often the goal is to leverage up the Company as much as the cash flow of the business and the debt markets will permit
More leverage makes the business inherently riskier, as more of the cash flows generated by the business will be used to pay interest expense and debt service

The amount of leverage is largely determined by the state of the debt markets
4

Uses for an LBO Model on the Buy-Side
The amount of leverage is largely determined by the state of the debt markets
For the last several years, the debt markets have been experiencing excess liquidity
Because of the excess liquidity, lenders have been allowing higher leverage levels
Depending on the industry and business, transactions over the last several years have been leveraged at between 4.0x – 6.0x recent EBITDA These higher leverage levels allow the financial sponsor to pay more for the company and still attain its required IRR

The leverage level of 4.0x – 6.0x recent EBITDA is comprised of some combination of senior secured loans and junior loans (second lien, third lien, unsecured loan, hybrid debt / equity securities) Lenders may require the financial sponsor to have a minimum equity investment as % of total capitalization

Minimum equity contribution is typically around 20% - 25%, depending on industry and purchase price

5

Uses for an LBO Model on the Buy-Side
The LBO Model is also used for the Lenders’ perspectives
Lenders like to see expected leverage...
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