Walk me through an LBO model.

  1. Understand the company and make assumptions
    • Transaction assumptions: entry / exit multiple, debt assumptions
    • Operating assumptions: revenue growth, margins, capex, etc.
  2. Create sources and uses tables
  3. Calculate initial required equity, which is the plug to make total sources equal to total uses
    • Sponsor equity = total uses – debt raised – other sources of capital like management rollover
    • Sources: debt, equity and management rollover raised to purchase the company and pay fees
    • Uses: how the capital will be used, typically equal to the purchase price plus fees
  4. Project 3 financial statements without the impact of debt
    • Project income statement without interest expense
    • Project the first two sections of the cash flow statement without cash flow from financing
    • Cash flow from operations + cash flow from investing = cash flow available for debt repayment
  5. Adjust balance sheet for transaction
    • Remove old debt, put in new debt
    • Remove old shareholder’s equity, put in new shareholder’s equity
    • Remove old cash, put in new minimum cash balance
    • Add capitalized financing fees
  6. Build debt schedule, link the interest expense and the repayment / borrowing to the 3 financial statements
  7. Build exit waterfall and calculate multiple of capital and IRR
  8. Perform sensitivity and scenario analysis