Chapter 5 (LBO Analysis)
What are the primary functions of LBO analysis?ANSWEROn the financing side, the banker uses LBO
analysis to help craft a viable financing structure for the target, which encompasses the amount, type,
and terms of debt, as well as the equity contribution. In an M&A advisory context, the banker uses LBO
analysis to determine an implied valuation range for a given target in a potential LBO sale based on
achieving acceptable returns.
How is LBO analysis used to analyze and craft financing structure?ANSWERThe output enables the
banker to analyze a given financing structure on the basis of cash flow generation, debt repayment,
credit statistics, and investment returns over a projection period.
Who chooses the preferred financing structure for a given LBO?ANSWERThe sponsor chooses—often a
compilation of the best terms from proposals solicited from several banks.
How is LBO analysis used to determine valuation?ANSWERThe valuation output is premised on
assumptions for financial projections, purchase price, and financing structure, as well as exit multiple
and year (assuming an exit via a sale). Therefore, sensitivity analysis is performed on these key value
drivers to produce a range of IRRs used to frame valuation for the target. Sponsors typically target 20%+
IRRs in assessing acquisition opportunities and determine valuation accordingly.
What IRR threshold has historically served as the standard for sponsors in considering an LBO?
ANSWER20%+
Which of the following are key components of an LBO analysis transaction summary page?
A) Sources and uses of funds
B) Capitalization and credit statistics summary
C) Debt schedule
D) Assumptions summary pageANSWERA) Sources and uses of funds and B) Capitalization and credit
statistics summary
, Under what circumstances might a strategic buyer use LBO analysis?ANSWERTo determine the price a
financial sponsor bidder can afford to pay when competing for an asset in an auction process.
What are the key sensitivities performed in LBO analysis?ANSWERPurchase price (entry multiple),
leverage, exit year, and exit multiple.
In an organized M&A sale process, what is typically the primary source for the Management Case
financial projections used in the LBO model?ANSWERThe CIM (sell book).
Which of the following historical financial data is most relevant for framing projections and performing
LBO analysis?
A) Sales growth
B) EBITDA and EBIT margins
C) Capex
D) Interest expenseANSWERA) Sales growth, B) EBITDA and EBIT margins, and C) Capex
Why is historical interest expense considered irrelevant for building the LBO model?ANSWERThe target's
prior annual interest expense and net income are not relevant given that the target will be recapitalized
with a new capital structure and associated debt terms through the LBO.
List four of the different operating cases used by the banker for an internal LBO
analysis.ANSWERManagement case
−Base case
−Downside case(s)
−Sponsor case
What are the three primary sections of a cash flow statement?ANSWERCash flow from operating
activities
−Cash flow from financing activities
−Cash flow from investing activities
What are the primary functions of LBO analysis?ANSWEROn the financing side, the banker uses LBO
analysis to help craft a viable financing structure for the target, which encompasses the amount, type,
and terms of debt, as well as the equity contribution. In an M&A advisory context, the banker uses LBO
analysis to determine an implied valuation range for a given target in a potential LBO sale based on
achieving acceptable returns.
How is LBO analysis used to analyze and craft financing structure?ANSWERThe output enables the
banker to analyze a given financing structure on the basis of cash flow generation, debt repayment,
credit statistics, and investment returns over a projection period.
Who chooses the preferred financing structure for a given LBO?ANSWERThe sponsor chooses—often a
compilation of the best terms from proposals solicited from several banks.
How is LBO analysis used to determine valuation?ANSWERThe valuation output is premised on
assumptions for financial projections, purchase price, and financing structure, as well as exit multiple
and year (assuming an exit via a sale). Therefore, sensitivity analysis is performed on these key value
drivers to produce a range of IRRs used to frame valuation for the target. Sponsors typically target 20%+
IRRs in assessing acquisition opportunities and determine valuation accordingly.
What IRR threshold has historically served as the standard for sponsors in considering an LBO?
ANSWER20%+
Which of the following are key components of an LBO analysis transaction summary page?
A) Sources and uses of funds
B) Capitalization and credit statistics summary
C) Debt schedule
D) Assumptions summary pageANSWERA) Sources and uses of funds and B) Capitalization and credit
statistics summary
, Under what circumstances might a strategic buyer use LBO analysis?ANSWERTo determine the price a
financial sponsor bidder can afford to pay when competing for an asset in an auction process.
What are the key sensitivities performed in LBO analysis?ANSWERPurchase price (entry multiple),
leverage, exit year, and exit multiple.
In an organized M&A sale process, what is typically the primary source for the Management Case
financial projections used in the LBO model?ANSWERThe CIM (sell book).
Which of the following historical financial data is most relevant for framing projections and performing
LBO analysis?
A) Sales growth
B) EBITDA and EBIT margins
C) Capex
D) Interest expenseANSWERA) Sales growth, B) EBITDA and EBIT margins, and C) Capex
Why is historical interest expense considered irrelevant for building the LBO model?ANSWERThe target's
prior annual interest expense and net income are not relevant given that the target will be recapitalized
with a new capital structure and associated debt terms through the LBO.
List four of the different operating cases used by the banker for an internal LBO
analysis.ANSWERManagement case
−Base case
−Downside case(s)
−Sponsor case
What are the three primary sections of a cash flow statement?ANSWERCash flow from operating
activities
−Cash flow from financing activities
−Cash flow from investing activities
