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LBO Model Overview and Steps

LBO Model Build

1

Sources & Uses

Map purchase price funded by senior debt, mezz, and sponsor equity.

2

Operating Model

Revenue, costs, and EBITDA projections during hold period.

3

Debt Schedule

Track interest expense and principal paydowns each year.

4

Exit & Returns

Exit multiple × terminal EBITDA. IRR and MoIC calculations.

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Learn how to build a Leveraged Buyout (LBO) model in Excel, taking into account the acquisition of another company using borrowed money, the specific mix of debt and equity used to finance the transaction and estimating the profitability of potential investments.

A leveraged buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

You can watch the video on the LBO overview and theory in another section. In this video, we will build an LBO model in Excel.

In our example, Kohlberg Kravis Roberts, an American global investment company that includes private equity management, acquires Dave and Buster’s at 25% premium to its current valuation.

Our model will include three main steps:

Step 1: LBO Transaction Summary and Sources and Uses of Funds

The Sources and Uses table is a summary of the amount of funding required to complete a M&A transaction.

The sources & uses section lists the total cost of acquiring the target in a hypothetical transaction structure.

The “Uses” side calculates the total amount of capital required to make the acquisition (i.e., the purchase price and transaction fees), whereas the “Sources” side details how exactly the deal is going to be funded, including the required amount of debt and equity financing.

Step 2: Capital Structure

Capital structure refers to the specific mix of debt and equity used to finance an LBO transaction.

The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is calculated by dividing a company's EBIT by its interest expense during a given period.

Generally, a higher coverage ratio is better, although the ideal ratio may vary by industry.

Step 3: Model – Net Cash Flow and IRR calculation

Net cash flow is calculated and used to find out the internal rate of return (IRR), which is a metric used in financial analysis to estimate the profitability of potential investments, in our case scenario – the profitability of the LBO transaction.

The key difference between IRR and XIRR is the way each formula handles cash flows. IRR doesn't take into account when the actual cash flow takes place, so it rolls them up into annual periods. By contrast, the XIRR formula considers the dates when the cash flow actually happens.

Equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested.