How Do You Value An LBO?

Why is debt cheaper than equity?

As the cost of debt is finite and the company will not have any further obligations to the lender once the loan is fully repaid, generally debt is cheaper than equity for companies that are profitable and expected to perform well..

What is the largest LBO in history?

The largest leveraged buyout in history was valued at $32.1 billion, when TXU Energy turned private in 2007.

Is LBO a valuation method?

A leveraged buyout (LBO) valuation method is a type of analysis used for valuation purposes. The alternative sources of funds are analyzed in terms of their contribution to the net IRR. This analysis is carried out in order to project the enterprise value of a company by the financial buyer that acquires it.

How does a LBO work?

A leveraged buyout (LBO) is one company’s acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. … This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.

What makes a LBO a LBO?

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.

What is the purpose of an LBO model?

The aim of the LBO model is to enable investors to properly assess the transaction and earn the highest possible risk-adjusted internal rate of return (IRR) In other words, it is the expected compound annual rate of return that will be earned on a project or investment..

What is the difference between LBO and MBO?

LBO is leveraged buyout which happens when an outsider arranges debts to gain control of a company. MBO is management buyout when the managers of a company themselves buy the stakes in a company thereby owning the company. In MBO, management puts up its own money to gain control as shareholders want it that way.

How does an LBO create value?

Financial sponsors tend to create value in LBO transactions in three different ways: operational improvements, debt expansion and multiple expansion. … The last value creation option, on the other hand, focuses on the features of the sponsor rather than on those of the target.

What is a good LBO candidate?

Characteristics of a Good LBO CandidateStrong, predictable operating cash flows with which the leveraged company can service and pay down acquisition debt.Mature, steady (non-cyclical), and perhaps even boring.Well-established business and products and leading industry position.More items…

What factors have the biggest impact on an LBO model?

What variables impact an LBO model the most? Purchase and exit multiples have the biggest impact on the returns of a model. After that, the amount of leverage (debt) used also has a significant impact, followed by operational characteristics such as revenue growth and EBITDA margins.

What is a paper LBO?

The goal of a paper LBO is to calculate IRR and MOIC and you can’t calculate them without the Entry Equity Check. Second, project out Levered Free Cash Flow. This step gives you the numbers (i.e. exit EBITDA and cash) that you need to calculate your Exit Equity Value.

What are the 4 main drivers of the change in IRR for an LBO scenario?

Lower purchase. Exit Multiple. Amount of Leverage. EBITDA expansion.

What happens to existing debt in an LBO?

For the most part, a company’s existing capital structure does NOT matter in leveraged buyout scenarios. That’s because in an LBO, the PE firm completely replaces the company’s existing Debt and Equity with new Debt and Equity.

Would an LBO or DCF give a higher valuation?

Would an LBO or DCF give a higher valuation? Technically it could go either way, but in most cases the LBO will give you a lower valuation. … With a DCF, by contrast, you’re taking into account both the company’s cash flows in between and its terminal value, so values tend to be higher.

How do you make an LBO model?

The following steps are essential to building a thorough and insightful LBO model:#1. Assumptions. … #2. Financial Statements. … #3. Transaction Balance Sheet. … #4. Debt and Interest Schedules. … #5. Credit Metrics. … #6. DCF and IRR. … #7. Sensitivity Analysis, Charts, and Graphs.