LBO MODELING | FINANCEABLE EXAM QUESTIONS AND
ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
GRADED A++
LBO
Leveraged buy out
- Is an acquisition of a business which a meaningful portion of the purchase price
through debt
- Executed by PE funds (holding period for 5 years)
- Late stage businesses
The LBO Process
1. Purchase price (usually EBITDA * Multiple = TEV)
2. Fund the deal
3. Use cash flow to pay down debt
4. Sale of the company (calculate TEV)
5. Pay the lender
6. MOIC (multiple of invested capital - multiple) or IRR
LBO Sources & Uses
Sources: Funding available
Uses: Funding needed (start with uses)
, - Advisor fees, financing (lender) fees
- Impacts all 3 financial statements
The impact of debt
- Amplifies outcome (good or bad)
- The more debt, the less cash flow
Purchase price as a LBO value driver
EBITDA growth as a LBO value driver
Cash Flow (ie. Paydown) as a LBO value driver
Secondary value drivers (less control over it as a buyer)
1. Level of debt at purchase
2. Interest rate on debt
3. Exit multiple
Private Equity Fund
- Pooled investment vehicle that gathers money from investors and invests that money
in return for fees
- Usual refers to LBO funds
- PE funds typically buy entire companies with the aim of selling the company in 5 years
- 2%/20% -> management fee/profit generated
PE Fund Structure
PE Process
LBO Candidate Characteristics
1. Stable business (visible/predictable business)
2. Growth opportunities + competitive advantages (rev increase, cost decrease -
ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
GRADED A++
LBO
Leveraged buy out
- Is an acquisition of a business which a meaningful portion of the purchase price
through debt
- Executed by PE funds (holding period for 5 years)
- Late stage businesses
The LBO Process
1. Purchase price (usually EBITDA * Multiple = TEV)
2. Fund the deal
3. Use cash flow to pay down debt
4. Sale of the company (calculate TEV)
5. Pay the lender
6. MOIC (multiple of invested capital - multiple) or IRR
LBO Sources & Uses
Sources: Funding available
Uses: Funding needed (start with uses)
, - Advisor fees, financing (lender) fees
- Impacts all 3 financial statements
The impact of debt
- Amplifies outcome (good or bad)
- The more debt, the less cash flow
Purchase price as a LBO value driver
EBITDA growth as a LBO value driver
Cash Flow (ie. Paydown) as a LBO value driver
Secondary value drivers (less control over it as a buyer)
1. Level of debt at purchase
2. Interest rate on debt
3. Exit multiple
Private Equity Fund
- Pooled investment vehicle that gathers money from investors and invests that money
in return for fees
- Usual refers to LBO funds
- PE funds typically buy entire companies with the aim of selling the company in 5 years
- 2%/20% -> management fee/profit generated
PE Fund Structure
PE Process
LBO Candidate Characteristics
1. Stable business (visible/predictable business)
2. Growth opportunities + competitive advantages (rev increase, cost decrease -
