What Is Leveraged Buyout Model Aka LBO Model?

What is Leveraged Buyout Model aka LBO Model?
An LBO, or Leveraged Buyout, model is a financial model used in corporate finance to

evaluate the acquisition of a company using a significant amount of debt to finance the
purchase. In an LBO, a financial sponsor (such as a private equity firm) acquires a
company, typically using a combination of equity and debt, with the intention of selling
the company at a higher valuation in the future.
Example:
Basic LBO Model – CoffeeCo (Assumption)
• Company Overview: CoffeeCo is a privately-owned coffee company with $1bn in
revenue and $100mm in EBITDA. The PE firm expects a 10% YoY revenue growth with
a constant EBITDA margin.
• Financing: The PE firm obtained 4.0x EBITDA in Term Loan B financing with a seven-
year maturity, 5% mandatory amortization, and priced at LIBOR + 400 with a 2% floor.
A $50mm revolving credit facility is included, priced at LIBOR + 400 with an unused
commitment fee of 0.25%. Additionally, 2.0 times in Senior Notes were raised with a
seven-year maturity and an 8.5% coupon rate. Financing fees were 2% for each
tranche and total transaction fees were $10mm.
• Balance Sheet: CoffeeCo has $200mm of existing debt and $25mm in cash, with
$20mm considered excess cash. The business will be delivered on a “cash-free, debt-
free basis”, meaning the seller is responsible for extinguishing the debt and keeps all
the excess cash. The remaining $5mm in cash is required to keep the business
operating smoothly.
• Assumptions: Each year, CoffeeCo’s depreciation & amortization expense will be 2%
of revenue, capital expenditures requirement will be 2% of revenue, the change in net
working capital will be 1% of revenue, and the tax rate will be 35%.
• Purchase and Exit: The PE firm plans to purchase CoffeeCo at 10.0x LTM EV/EBITDA
on 12/31/2020 and exit at the same LTM multiple after a five-year time horizon. The
implied IRR and cash-on-cash return of the investment need to be calculated.
Steps to Create a Basic Leveraged Buyout (LBO) Model
• Input Transaction and Operating Assumptions: Define the key assumptions about the
entry and transaction, such as the purchase price, multiples, Cash to Balance sheet,
debt and equity financing, and operating assumptions like revenue growth and
EBITDA margin.
Entry Assumptions Financing Assumptions Transaction Assumption

LTM EBITDA $100.00 Senior Note @ 8.50% Cash to B/S $5.00
Entry Multiple 10.00x Financing Fees 2% Financing Fees 2.00%
Purchase Enterprise Value $1,000.00 Term Loan B Floor 2% Transaction fees $10.00
TLB Amortization 5% Financing fees
period $7.00
Operating Assumptions 2024E 2025E 2026E 2027E 2028E

Revenue Growth 10.00% 10.00% 10.00% 10.00% 10.00%
EBITDA Growth Flat 10% 10% 10% 10% 10%
D&A of Revenue 2.00% 2.00% 2.00% 2.00% 2.00%
CAPEX% of Revenue 2.00% 2.00% 2.00% 2.00% 2.00%
Change in NWC% of Revenue 1.00% 1.00% 1.00% 1.00% 1.00%
Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00%
Debt Assumptions EBITDA x Amount Rate Floor %Amort %Fee Fees

Revolver 0.00x $0.00 L + 400.00 2.00% $0.00
Term Loan B 4.00x $400.00 L + 400.00 2.00% 5.00% 2.00% $8.00
Senior Notes 2.00x $200.00 8.50% 2.00% $4.00
Total Debt 6.00 $600.00 $12.00
• Build Sources and Uses of Funds Table: Identify the sources of funds (equity, debt)
and their uses (purchase price, fees). This will help determine the amount of leverage
(debt) in the transaction. Remember, the amount sourced should equal the amount
used.
Sources EBITDA x Amount Uses Amount
Revolver 0.00x $0.00 Purchase Enterprise Value $1,000.00
Term Loan B 4.00x $400.00 Cash to B/S $5.00
Senior Notes B 2.00x $200.00 Transaction Fees $10.00
Sponsor Equity 4.27x $427.00 Financing Fees $12.00
Total 10.27x $1,027.00 Total $1027.00
• Financial Forecast: Project the company’s income statement, balance sheet, and cash
flow statement based on the operating assumptions. This includes forecasting of
revenue, EBITDA, and free cash flow. Determine the company’s free cash flow, which
is used to pay down debt. FCF is typically calculated as EBITDA less taxes, capital
expenditures, and change in net working capital. I have prepared a concise financial
forecast. However, for a more detailed and accurate analysis, we need to create a
three-statement model.
Financials 2023A 2024E 2025E 2026E 2027E 2028E
Revenue $1,000.00 $1,100.00 $1,210.00 $1,331.00 $1,464.10 $1,610.51
EBITDA $100.00 $110.00 $121.00 $133.10 $146.41 $161.05

Less: D&A ($22.00) ($24.20) ($26.62) ($29.28) ($32.21)
EBIT $88.00 $96.80 $106.48 $117.13 $128.84
Less: Interest ($40.53) ($39.33) ($38.13) ($37.26) ($36.66)
Less: Amortization of Financing Fees ($1.71) ($1.71) ($1.71) ($1.71) ($1.71)
EBT $45.76 $55.76 $66.64 $78.16 $90.47
Less: Taxes ($16.02) ($19.52) ($23.32) ($27.36) ($31.67)
Net Income $29.74 $36.24 $43.32 $50.80 $58.81
Plus: D&A $22.00 $24.20 $26.62 $29.28 $32.21
Plus: Amortization of Financing Fees $1.71 $1.71 $1.71 $1.71 $1.71
Less: CAPEX ($22.00) ($24.20) ($26.62) ($29.28) ($32.21)
Less: Δ in NWC ($11.00) ($12.10) ($13.31) ($14.64) ($16.11)
Less: Mandatory Amortization ($20.00) ($20.00) ($20.00) ($20.00) ($20.00)
Free Cash Flow (Pre-Revolver) $0.46 $5.86 $11.72 $17.88 $24.42
Revolver Drawdown / (Pay down)
Free Cash Flow (Post-Revolver) $0.46 $5.86 $11.72 $17.88 $24.42
Beginning Cash Balance $5.00 $5.46 $11.32 $23.04 $40.91

Net Change in Cash Flow $0.46 $5.86 $11.72 $17.88 $24.42
Ending Cash Balance $5.46 $11.32 $23.04 $40.91 $65.33
• The three-statement model includes the Income Statement, Balance Sheet, and Cash
Flow Statement. These three financial statements are interconnected and allow for
the detailed financial analysis and forecasting necessary in an LBO model. As I
mentioned Earlier, this is a Basic LBO model, that why I put the short financial
forecasting.
• By integrating three financial statements, you can create a comprehensive financial
model that helps assess the viability of the LBO and the potential returns from the
investment. It’s important to note that the accuracy of the LBO model heavily relies
on the accuracy of these financial projections.
• Debt Schedule: Create a schedule to track the repayment of debt over time. This
includes the mandatory repayments and any optional repayments made with excess
free cash flow.
Debt Schedule 2024E 2025E 2026E 2027E 2028E
LIBOR (%) 1.50% 1.70% 1.90% 2.10% 2.30%
Revolver
Beginning Balance $0.00 $0.00 $0.00 $0.00 $0.00
Revolver Drawdown / (Pay down) $0.00 $0.00 $0.00 $0.00 $0.00
Ending Balance $0.00 $0.00 $0.00 $0.00 $0.00
Total Revolver Capacity $50.00 $50.00 $50.00 $50.00 $50.00

Beginning Available Capacity $50.00 $50.00 $50.00 $50.00 $50.00
Ending Available Capacity $50.00 $50.00 $50.00 $50.00 $50.00
Revolver Interest Rate 5.50% 5.70% 5.90% 6.10% 6.30%

Revolver Interest Expense $0.00 $0.00 $0.00 $0.00 $0.00
Unused Revolver Commitment Fee 0.25% 0.25% 0.25% 0.25% 0.25%

Unused Commitment Fee $0.13 $0.13 $0.13 $0.13 $0.13
Term Loan B
Less: Mandatory Amortization ($20.00) ($20.00) ($20.00) ($20.00) ($20.00)
Ending Balance $380.00 $360.00 $340.00 $320.00 $300.00
TLB Interest Rate 6.00% 6.00% 6.00% 6.10% 6.30%

TLB Interest Expense $23.40 $22.20 $21.00 $20.13 $19.53
Senior Notes
Less: Mandatory Amortization $0.00 $0.00 $0.00 $0.00 $0.00
Ending Balance $200.00 $200.00 $200.00 $200.00 $200.00
Senior Notes Interest Rate 8.50% 8.50% 8.50% 8.50% 8.50%

Senior Notes Interest Expense 17.00 17.00 17.00 17.00 17.00
• Exit Assumptions and Returns Schedule: Make assumptions about the exit after a
certain period (usually 5-7 years), including the exit multiple. Calculate the return
metrics, such as the internal rate of return (IRR) and the multiple on invested capital
(MOIC), based on the exit assumptions.
Return Calculation 2024E 2025E 2026E 2027E 2028E

Exit LTM EBITDA $110.00 $121.00 $133.10 $146.41 $161.05
Exit Multiple Assumption 10.00x 10.00x 10.00x 10.00x 10.00x
Exit Enterprise Value $1,100.00 $1,210.00 $1,331.00 $1,464.10 $1,610.51
Less: Debt ($580.00) ($560.00) ($540.00) ($520.00) ($500.00)
Plus: Cash $5.46 $11.32 $23.04 $40.91 $65.33
Exit Equity Value $525.46 $661.32 $814.04 $985.01 $1,175.84
Cash (Outflows) / Inflows Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28
Exit Year 2024 (427.00) 525.46
Exit Year 2025 (427.00) 661.32
Exit Year 2026 (427.00) 814.04
Exit Year 2027 (427.00) 985.01
Exit Year 2028 (427.00) 1175.84
IRR 22.99% 24.41% 23.97% 23.22% 22.43%
MOIC 1.23x 1.55x 1.91x 2.31x 2.75x
Remember, an LBO model is a simplified representation of a transaction and does not

capture all the complexities involved in a real-world LBO. However, it provides a good
starting point for understanding the mechanics of an LBO and the potential returns to
the financial sponsor.

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What is Leveraged Buyout Model aka LBO Model?

An LBO, or Leveraged Buyout, model is a financial model used in corporate finance to

Entry Assumptions Financing Assumptions Transaction Assumption

Operating Assumptions 2024E 2025E 2026E 2027E 2028E

Debt Assumptions EBITDA x Amount Rate Floor %Amort %Fee Fees

EBITDA $100.00 $110.00 $121.00 $133.10 $146.41 $161.05

Beginning Cash Balance $5.00 $5.46 $11.32 $23.04 $40.91

Total Revolver Capacity $50.00 $50.00 $50.00 $50.00 $50.00

Revolver Interest Rate 5.50% 5.70% 5.90% 6.10% 6.30%

Unused Revolver Commitment Fee 0.25% 0.25% 0.25% 0.25% 0.25%

TLB Interest Rate 6.00% 6.00% 6.00% 6.10% 6.30%

Senior Notes Interest Rate 8.50% 8.50% 8.50% 8.50% 8.50%

Return Calculation 2024E 2025E 2026E 2027E 2028E

Cash (Outflows) / Inflows Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Remember, an LBO model is a simplified representation of a transaction and does not

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