Simple LBO Model: Video Tutorial
In this video tutorial, we'll build a leveraged buyout (LBO) model, given some operating and valuation assumptions, in Excel.
The goal of this video is to show you that an LBO model is actually a very simple transaction at its core – and quite similar to the mechanics involved when purchasing a home.
Simple LBO Model – Excel Template
Use the form below to download the Excel template that goes along with the simple LBO model video series.
Building a Simple LBO Model (Video 1 of 3)
Building a Simple LBO Model (Video 2 of 3)
Building a Simple LBO Model (Video 3 of 3)
Additional LBO Resources
We hope you found this video tutorial. If these videos made sense, you have a basic foundation for delving deeper into the more complicated mechanics of an LBO Model.
If you are preparing for private equity interviews, below are additional tutorials to show you exactly how private equity firms test your LBO knowledge via interview questions and modeling tests:
- Top 25 Private Equity Interview Questions – Baseline knowledge around the technical aspects you'll be expected to know in PE interviews.
- Paper LBO Test – Given at earlier rounds, you'll get a pen and paper (no calculator) and 5–10 minutes
- Basic LBO Modeling Test – You're given a laptop, simple instructions and ~30 minutes – this serves as a slightly more robust early-round screen than the Paper LBO
- Standard LBO Modeling Test – You're given a laptop and 1–2 hours. This is the most common LBO Modeling Test given at lower-middle market and middle-market PE firms.
- Advanced LBO Modeling Test – You're given a Laptop, a 5-15 page packet of financial data, and 3–4 hours. You're most likely to see this from upper-middle market firms or mega-funds in the later rounds of the interview process.
Level up your career with the world’s most recognized private equity investing program. Enrollment is open for the upcoming cohort.
After Video 2, where do we see the deduction in cash/FCF after the REQUIRED debt pay down? I say this for the formula in cash (row 41) – why isn’t cash deducted another 1,000? Where is the 1,000 required pay down coming from? Thanks!
The 1,000 deducted per year is our assumption as stated in the beginning part of video 2. The formula in row 41 depends on the formula in row 50 which calculates the options repayment in the year AFTER the 1000 has been paid mandatorily. The deduction in cash/FCF after the required debt paydown is implicit – it’s captured in the line item in line 38 – free cash flow available after required debt paydown of 1,000 – which again is our assumption.
When I calculate the exit multiple of 6.5x times the EBITDA in 2016 of 3,513.8, I get 22,840, not 22,696 as you show in this video. What did I do incorrectly?
Warren,
Check if you calculated your revenues / EBITDA correctly – ensure they match up to the completed tab. Let me know if you’ve resolved this – thanks.
Haseeb
Hi,
Does this LBO works for everyone?
Dennis,
As with any LBO – you will have to make company-by-company adjustments, but overall it is a solid start.
Hi!
B:9 Current Debt, what kind of Debt we should put here? The whole company liability (assets minus capital) or only debt from banks, bonds etc interest debt?
If we are going to buyout a company, the price is 6 times EBITDA – 10M. 20% will be funded by our own source – $2M, and $ 8M from the bank. How I should made this adjustments?
Thanks for a really great and usefull model!
Hi Sadin,
1) Debt is normally considered to be liabilities that are interest bearing, contractual liabilities (so yes, debt from banks, bonds, etc.).
2) This is a simple LBO model, our more advanced model to allow for such tweaks can be found in our Advanced LBO Modeling Course (https://www.wallstreetprep.com/self-study-programs/adv-lbo-modeling/).
Shannan
Hi Sachin,
This would typically be defined as CFO + CFI – required debt principal payments – preferred cash dividends.
I hope this helps!
Shannan
B:16 Free cash flows after debt paydown
net operating cash flow minus net capital expenditures minus minus debt payment plus raise debt?
Hi
Why do we not take into account the opening debt (cell 42) in the debt schedule? We do appear to take into account the opening cash, so it seems inconsistent that we don’t take into account opening debt?
Thank you for a great tutorial!
Joe – the LBO entails that you raise all new debt facilities to replace the old debt – you have a new, highly leveraged capital structure – hope this helps!
Hi All,
I have a question on exit date: why the investor assumes it sells Target after 5 years? What will the investor do if the market is still avourable after this 5years. Will he stay with its investment in Target or sells irrespectively of good market conditions?
Cezary,
The 5-year horizon is the typical template structure we use to teach, but various PE firms will re-assess opportunities at any significant juncture. If a PE investment can yield significant return in 3 years, the PE firm will be opportunistic. A lot of consideration goes into market conditions, portfolio performance, returning capital to LPs, etc. Hope this helps give you a flavor for the answer. The long and short of it: it depends! 🙂
What is FCF after debt paydown? Is that Operating CF – Inv in PPE – debt principal repayments?
Elizabeth,
It would be CFO – CFI – Debt Repayment. Hope this helps – thanks!
The videos were really helpful in understanding the math behind LBOs. Thank you for making such videos.
Awesome – spread the word Nirvan!
Hi,
Isn’t it wrong to include the 100 in Cash (cell C41) in the optional paydown for 2013 (cell D50)?
The model implies that the cash balance initially on the company’s balance sheet are being used to pay down the debt, when the LBO is first carried out (thereby reducing EV), so cash balance beginning of LBO period should be 0 I would assume?
Jay:
We pay $15,500 for the business, which includes $100 of cash that we obtain use of. Given our assumption of a minimum cash balance of $50, we can use the remaining $50 plus the $528 in free cash flow after required debt paydown to support our optional paydown. The existing cash on the balance sheet isn’t being used until one year after the deal closes (not simultaneous as I believe you are thinking).
Best,
Jeff
Hi,
so that means that all the multiples stated are INCL. any transaction fees and min. cash? For some other practice cases, multiples are stated before financing and min. cash. How do I know when these need to be added to the total transaction value and when not?
Thanks
Jonathan:
No, multiples do not include transaction fees. Where do you see that?
Best,
Jeff
I saw that in a different case example they use the following items when calculating the sources & uses section. For Uses, they show:
Minimum Cash
Purchase Price
Fees and Expenses
Then you can get a multiple for the total uses which includes all 3 components. Is this at all used?
Thanks a lot for the feedback!
Jonathan:
We’re talking apples and oranges. Multiples are usually quoted as the takeover multiple, say 5x EBITDA, which does not include fees. However, sources and uses schedules do contain fees and cash balances but I don’t recall seeing a multiple restated to include transaction fees (that just could be my faulty recollection though).
Best,
Jeff
For Cash we added, prior cash ($100)+ additional from projection periods. However, we did not add prior debt of $600to 2012 debt, why?
Curious:
Did you mean why did we not add the $600 million in pre-LBO debt to 2013 (you wrote 2012)? It’s because the $600 million in pre-LBO debt would be refinanced at LBO close.
Best,
Jeff
I believe the question is more the following:
(i) The financial sponsor has this $20,480m to propose a purchase price to the current shareholders of XYZ: $14,400m of debt and $6,080m of its own cash. Maybe, this cash will go to a SPV that will acquire the company XYZ.
(ii) Nevertheless there are going to propose $20,480m – $500m to acquire the equity of the company (maximum that they can propose to have a 25% annual return).
(iii) But when the financial sponsor buy this company they have to repay this $600m debt, they will repay it using the $500m of cash that they did not include in the purchase price of equity + $100m of cash that XYZ is holding.
(iv) Therefore, how come the cash schedule begins with this $100m?
Thank you
Augustin:
If you are referring to the cash being $100 in cell C41 then that is the last actual cash balance before the acquisition (2012A). The buyer only requires $50 of cash so the new debt/equity will buyout the existing shareholders and pay off the $600 cash balance, along with $50 of the existing cash.
Best,
Jeff
Thank you very much for your answer. It is still not clear for me.
If the acquirer buy this the company XYZ for $19,980m ($20,480m – $500m) or c. $39 per share, the maximum that it can pay for 25% return. This cash is going to fully go to the actual shareholders of XYZ, not inside the company.
After that I am left with $100m of cash inside the company XYZ and this $500m that might be in a special purpose vehicle. My question is how do you reimburse the $600m of old debt? In this specific case that you are doing with what cash do you reimburse this loan?
Augustin:
The maximum the PE firm can put in is actually 6,080. The rest of the proceeds (14,400) comes from debt. The shareholders get the bulk of the proceeds since there isn’t much existing debt that needs to be paid down ($39.36 per share). There is no SPV involved here: the target company has 600 in debt and 100 in cash. The acquirer must pay off the existing 600 in debt with either a portion of the 20,480 raised to buy the company and/or the target company’s 100 cash balance. In our model we assumed the PE firm wants the target company to have 50 in cash. So the total proceeds of 20,480 plus 50 in existing cash is used to pay shareholders and the existing debt of 600.
Best,
Jeff
Hi for “LBO debt, beginning of period” for 2013, should it be 14,500? Because your net debt/EBITDA(debt capacity) multiple times LTM EBITDA gives net debt for LBO which is 14,400. Now to get LBO debt you need to add the current cash 100. Or am I wrong with any calculation?
Tony:
No, I think the LBO debt capacity of 6x should be relabeled to say Debt/EBITDA for better clarity. Thanks for pointing this out.
Best,
Jeff
Hi, could you explain why Enterprise value in the exit year is equivalent to EBITDA * EBITDA multiple (6.5x); arent Enterprise Value and EBITDA two different values?
Shane:
Yes, they are two different values. The EBITDA multiple is the ratio of Enterprise Value to EBITDA. Taking that number and multiplying it by EBITDA gives you enterprise value.
Best,
Jeff
In the second video, at the time between 3:55 – 3:56, what is the shortcut you used to fill in all the blanks to the right?
Michael:
I was using the Macabacus add-in and pressing Ctrl Shift R. Macabacus calls it “Fast Fill.”
Best,
Jeff
I don’t understand the pre-deal information, transaction and exit year
assumptions for CVS in the LBO primer. Can you explain it to me? Thank you.
What is you don’t understand? These are all general assumptions in our model.
Best,
Jeff
The equity value upon exit is less than its current market cap and we would be paying a premium. Why would you do this?
Elliott:
The equity investors are only putting in 6,080 to buy this company. At exit the equity value is 14,844 which represents a 33% IRR. This is a very good return and is an example of how an LBO can be profitable for equity investors.
Best,
Jeff