Overview of the LBO Modeling

A 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.

The working of the Concept of Leveraged BuyOut

There exists a similarity between purchasing a house and leveraged buyout as a combination of down payment as well as mortgage can be made use of. In the case of both these transactions, there is saving of money as a small amount is put down in cash and the remaining is borrowed. In case of the leveraged buyout, the “down payment” is known as the equity or the cash whereas the “mortgage” is known as the debt. The debt is utilised by the private equity firms for boosting its returns. If everything else is equivalent, it means that if the private equity firm makes use of more leverage or debt, the firm is likely to earn a higher rate of return on the investment that has been made by it.

As far as the real LBOs are concerned, the repayment of debt is made by the companies over a period of time which boosts the returns of the private equity firm even more. The numbers show a significant improvement with leverage due to the following reasons –

• What money is worth today is higher than what it will be worth in future – This means that earning higher amount of money 5 years from now will be great, however, it is much better t=if that same amount of money is saved today because of money’s time value.
• Earning a higher amount of return on a money of a smaller amount is much more easy – It is difficult for the portfolio managers with thousands of crores under management to earn rates of return that are high, however for individual investors who have for example made investments of less than one crore, it is much more easier to earn returns that are higher. This is the reason why leverage is used by the private equity firms. It goes on to boost their returns in a significant way by bringing reductions in the upfront investment.

Building a LBO Model

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 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 if the cash flow of the company is unpredictable.

Course Description

The course of the LBO Modeling is divided into various sections as well as subsections in the following way –

LBO Analysis of the American Eagle Outfitters

• Overview
• Assumptions for the transaction
• Debt Assumptions
• Sources as well as uses
• Populating of the historical values

Build-up of Revenue

• Revenue Build-up

Cost Sheet

• Calculations of the cost sheet

Management of Working Capital

• Management of working capital
• Management of working capital
• Ratios as well as Assumptions

Depreciation and Amortization

• Capex – Base Equation
• Depreciation Schedule
• Calculation of Depreciation
• Schedule of Amortization

Linkages to Financial Statements

• Linkage of the income statement
• Linkage of the balance sheet
• Linkage of the cash flow statement

Equity Schedule of the Shareholders

• Equity Schedule of the Shareholders

Schedule of Debt

• Schedule of Debt
• Completion of the Missing Links

IRR and Sensitivity Analysis

• Calculation of IRR
• Sensitivity Analysis

What are the requirements/pre-requisites?

The main requirements for the LBO Modeling course consist of the following –

• A computer that has an internet connection
• Basic introductory knowledge of working in excel
• Basic introductory knowledge related to accounting
• A general exposure to corporate finance will be of help although it is not essential to have such an exposure

Target Audience for this training

The target audience for the training of LBO Modeling includes the following –

• Novice students who have interest pursuing a career in the financial sector
• Working Professionals
• Any other person who may have interest in undertaking the course of LBO Modeling

For any query call/miss call-

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Section 1 Introduction

1. Introduction to LBO

Section 2 Historical Financial Statements

2              Consolidated Balance Sheet

3              Consolidated Balance Sheet Continue

4              Assumptions

5              Assumptions Continue

Section 3 Forecast Financial Statements

6              Sources Uses of Funds

7              Opening Balance Sheet

8              Forecast Financial Statements

9              Forecast Financial Statements Continues

10           Debt Amortization Schedule

11           Cash Available for TLB

12           Forecast Financial Statements and IRR

13           More on Forecast Financial Statements 5 and IRR

14           IRR Sensitivity

Here is a sample for the course completion certificate which you will receive after complete the course. This certificate is widely accepted across industries and will boost your chances to grab the job opportunities.

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• Name
• Course Name
• Date of Completion
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