Leveraged Buyout (LBO): Model and Metrics

Leveraged Buyout (LBO) — the acquisition of a company using significant debt financing, where the collateral is the assets and cash flows of the acquired company itself. LBO is the principal strategy of Private Equity funds. A typical LBO structure: 60-75% debt (bank loans, high yield bonds), 25-40% equity (PE fund). The target company bears the debt burden on its own balance sheet.

Ideal LBO Target. Criteria that make a company attractive for an LBO: stable and predictable cash flows (high FCF for servicing debt), protected market position (pricing power), low capital expenditures (asset-light or moderate capex), potential for improvement of operational efficiency (operational improvement potential), diversified customer base (reducing revenue concentration risk), possibility to implement an exit strategy within 3-5 years.

LBO Model: Key Blocks. Sources and Uses: sources of financing (debt tranches + equity) equal uses (purchase price + fees + refinancing existing debt). Financial projections: forecast P&L (revenue, EBITDA, D&A, EBIT), Balance Sheet, Cash Flow Statement for 5 years. Debt schedule: calculation of debt repayment, interest expenses, covenant compliance. Exit analysis: calculation of exit value under various multiple assumptions.

Key LBO Metrics. Entry Multiple: EV/EBITDA at purchase (typically 7-12x depending on sector and period). Exit Multiple: EV/EBITDA at sale (assumption of comparable or higher multiple). IRR (Internal Rate of Return): target return for PE funds — 20-25% per year. MOIC (Multiple on Invested Capital): how many times the equity investment grew over the holding period (2.0-3.0x over 5 years is typical). Debt Paydown: how much debt was repaid over the period — a key source of equity value creation. Value Creation Attribution: division of final IRR into three sources — Multiple expansion (growth of the multiple), EBITDA growth (growth in operating profit), Debt paydown (debt reduction).

LBO Financing Structure. Senior Secured Debt: Term Loan A (amortized), Term Loan B (bullet repayment, higher spread), Revolving Credit Facility. Mezzanine: Senior Unsecured (high yield bonds), PIK (Payment-in-Kind) notes. Equity: common shares of the PE fund, management equity package. DSCR (Debt Service Coverage Ratio), Interest Coverage, Leverage covenants — key triggers in an LBO.