A simplified LBO model would not include a balance sheet or a full cash flow statement, although we still need the income statement and several key items from the cash flow statement. We would calculate levered free cash flow (LFCF) using the following formula:
LFCF = Net Income + D&A – capex – increase in net working capital + borrowings – mandatory debt repayments
This cash flow would then determine whether we need to borrow more debt or make additional optional prepayments to debt. IRR can be calculated by multiplying the exit multiple by the final year EBITDA to arrive at enterprise value, then subtracting net debt and calculating IRR based on ending equity and initial equity invested. The IRR formula is below:
IRR = (ending equity / initial equity invested) ^ (1/# of years) – 1