The first step to take in an LBO model is to remember to have your iteration setting turned off before starting The remaining steps broadly fall into three categories The first of these steps are your model inputs Here we'll include acquisition assumptions, so for instance if it's a public company you might want to include its current share price You then include the premium that you were going to pay above that You'll calculate the market value of equity and the acquisition equity value You'll then include interest rate assumptions on any debt that you're going to put into the deal Exit assumptions including the exit year and the exit EBITDA multiple The fees that you're going to have to pay and sources and uses of funds The fund will include buying the company, your sources of funds will include debt and equity So that's everything that will happen at entry and one or two things that will happen at exit We now move onto our second broad category of steps which is the cash sweep Remember in an LBO, we're trying to get our debt down as quickly as possible The first thing we need to do here is come up with an operating forecast, an income statement, Some balance sheet items that affect getting debt down and your cash flow statement From there, you can perform a cash sweep i.e. use all cash available to pay down debt And then create a debt schedule so you've got a record of the level of debt in each year From that, you can then calculated interest that needs to be paid and that can go back into your income statement and cash flow statement We now move onto the third broad group of steps, which are the model outputs We want to create credit ratios, make sure our debt level never breach any thresholds Calculate the equity IRRs for the various groups of shareholders Form our sensitive tables, for instance what if we were to vary the exit year? What would happen to the IRRs? And then perform a levered valuation