- Understand the company and make assumptions
- Transaction assumptions: entry / exit multiple, debt assumptions
- Operating assumptions: revenue growth, margins, capex, etc.
- Create sources and uses tables
- 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
- 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
- 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
- Build debt schedule, link the interest expense and the repayment / borrowing to the 3 financial statements
- Build exit waterfall and calculate multiple of capital and IRR
- Perform sensitivity and scenario analysis
Walk me through an LBO model.
Published On - May 1, 2023
