LEVERAGED BUY OUT

LEVERAGED BUY OUT

LEVERAGED BUY OUT

The PE firm aims to earn a return in the 20-25% range from doing LBO, which far exceeds the historical average annual return in the stock market. LBOs are similar to normal M&A deals, but in an LBO we assume that the buyer sells the target in the future. PE firms use leverage to significantly boost the return by reducing the upfront investment.

Steps involved in LBO valuation

Step 1 – Determine the purchase price and the amount of debt and equity required

Step 2 – Once the debt amount is calculated, find out the debt amount for different tranches of debt

Step 3 – Create a Source and Use of funds table to track how funds are used in the deal

Step 4 – Build Income statement projections based on assumptions for revenue and expenses

Step 5 – Calculate Free Cash Flow and the cash available for debt repayment

Step 6 – Complete the debt schedule and determine the mandatory and optional payment

Step 7 – Link the debt schedule to the cash flow statement and the income statement

Step 8 – Calculate exit equity value and thus investor return

No Comments

Post a Reply

en_USEnglish
en_USEnglish
Skip to toolbar