Structure and Financing LBO| Valuation Methods| Financial Modeling Build-up of Revenue| Cost Sheet| Equity Schedule
What you will learn
Determination of the price of purchase as well as the amount of equity and debt
The income statement projections are built on the basis of the assumptions for revenue as well as for expenses
Calculation of the “Free Cash Flow” is done along with the cash that is available for the repayment of debt
The debt schedule is completed and the mandatory as well as the optional repayments are determined
Description
LBO Modeling is a process that can be divided into 8 steps. These steps consist of –
- Determination of the price of purchase as well as the amount of equity and debt which will be required
- The debt tranches are assigned with the repayment percentages, interest rates and percentage totals
- A table of “Sources and Uses” is created for tracking the ways the funds will be used in the deal
- The income statement projections are built on the basis of the assumptions for revenue as well as for expenses
- Calculation of the “Free Cash Flow” is done along with the cash that is available for the repayment of debt
- The debt schedule is completed and the mandatory as well as the optional repayments are determined
- The debt schedule is then linked to the cash flow statement and also to the income statement
- The investor returns are then calculated and the sensitivity tables are created
Ideal Candidates for the Leveraged BuyOut
The “ideal” candidate for the LBO Model should –
- Have cash flows that are stable as well as predictable for repayment of debt
- Be undervalued with respect to the industry peers (lower price of purchase)
- Be a business that is associated with low risks (repayment of debts)
- The need for ongoing investments like CapEx should not be much
- Have the capability of cutting costs and increasing margins
- Have a management team that is strong
- Have a solid asset base for using as collateral for debt
Of all the points the first one is of utmost significance as nobody will lend to a company as well as finance an LBO model if the cash flow of the company is unpredictable.
An LBO model of leveraged buyout shows what all takes place when a company is acquired by a private equity firm by using a combination of equity or cash along with debt which is then sold off within a period of 3-5 years. By taking such a step, the aim of the private equity firm is to earn a return of 20 -25 percent which is far in excess of the “historical average annual return” in case of the stock markets. The leveraged buyouts are more or less same to the normal deals of merger and acquisitions; the only difference is that in a leveraged buyout, the assumption is that the buyer will be selling the target in future.
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