Scribd
Upload
1K views

LBO Case Study

This document provides instructions and assumptions for constructing a leveraged buyout (LBO) model of ABC Target Company. XYZ Private Equity Partners plans to purchase ABC for 5.0x forward 12 months EBITDA. The debt-to-equity ratio for the acquisition will be 60:40, with an interest rate of 10% on debt. ABC is expected to generate $100 million in sales the first year with a 40% EBITDA margin, increasing 10% annually. Capital expenditures will be 15% of sales each year. The model will calculate purchase price, debt and equity amounts, free cash flow, exit value at 5.0x EBITDA in year 5, ending debt, equity value, and estimated

Uploaded by

williamnyx
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
1K views

LBO Case Study

This document provides instructions and assumptions for constructing a leveraged buyout (LBO) model of ABC Target Company. XYZ Private Equity Partners plans to purchase ABC for 5.0x forward 12 months EBITDA. The debt-to-equity ratio for the acquisition will be 60:40, with an interest rate of 10% on debt. ABC is expected to generate $100 million in sales the first year with a 40% EBITDA margin, increasing 10% annually. Capital expenditures will be 15% of sales each year. The model will calculate purchase price, debt and equity amounts, free cash flow, exit value at 5.0x EBITDA in year 5, ending debt, equity value, and estimated

Uploaded by

williamnyx
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Leverage Buyout (LBO) Case Study

Instruction
Construct a LBO model based on the assumptions below.
Given LBO Parameters and Assumptions
1. XYZ Private Equity Partners purchases ABC Target Company for 5.0x Forward 12
months (FTM) EBITDA at the end of Year 0.
2. The debt-to-equity ratio for the LBO acquisition will be 60:40.
3. Assume the weighted average interest rate on debt to be 10%.
4. ABC expects to reach $100 million in sales revenue with an EBITDA margin of 40% in
Year 1.
5. Revenue is expected to increase by 10% year-over-year (y-o-y).
6. EBITDA margins are expected to remain flat during the term of the investment.
7. Capital expenditures are expected to equal 15% of sales each year.
8. Operating working capital is expected to increase by $5 million each year.
9. Depreciation is expected to equal $20 million each year.
10. Assume a constant tax rate of 40%.
11. XYZ exits the target investment after Year 5 at the same EBITDA multiple used at entry
(5.0x FTM EBITDA).
12. Assume all debt pay-down occurs at the moment of sale at the end of Year 5 (this
eliminates the iterative/circular dependency between debt pay-down/cash balances and
interest expense in a computer-based LBO model).

LBO Step-by-Step Guide


1. Calculate the purchase price of ABC.
(Hint: Using 5.0x entry multiple, calculate the price paid by multiplying Year 1 EBITDA)
2. Calculate Debt and Equity Funding Amounts used for the purchase price (Remember:
given information assume debt-to-equity ratio of 60:40)
3. Calculate Total Free Cash Flow (FCF).
4. Calculate Total Enterprise Value (TEV) at exit.
(Hint: Brought forward EBITDA multiply by exit multiple)
5. Calculate Net Debt at exit (also known as ending debt).
(Hint: Beginning Debt Debt Pay Down)
6. Calculate Ending Equity Value by subtracting Ending Debt from Exit TEV.
7. Calculate Multiple-of-Money (MoM) EV return (Formula: Ending EV divide by
Beginning EV)
8. Estimate IRR based on the MoM multiple.

The following table is useful for estimating IRR based upon 5-year MoM multiples:
2.0x MoM over 5 years ~15% IRR
2.5x MoM over 5 years ~20% IRR
3.0x MoM over 5 years ~25% IRR
3.7x MoM over 5 years ~30% IRR

You might also like