Could you walk me through the mechanics of building an lbo model? Sure. So the first step to building an lbo model is to calculate the implied entry valuation based on the entry multiple and last 12 months EBITDA of the target company.
Next the sources and uses section will lay out the proposed transaction structure.
The uses side will calculate the total amount of capital required to make the acquisition whereas the sources side will detail how the deal will be funded.
Most importantly the key question being answered is what is the size of the equity check the financial sponsor must contribute once you've got the sources and uses table.
The free cash flows fcfs of the company will be projected based upon the operational assumptions. For example, Revenue growth rate margins interest rates on debt and tax rates.
The FCFs generated is central to an LBO as a determines the amount of cash available for debt pay down and the interest expense due each year.
In the final step, the exit assumptions of the Investments are made i.e. exit multiple and date of exit.
The total proceeds received by the private equity firm are used to calculate the irr and cash on cash return with a variety of sensitivity tables attached below.
Here they are testing to see whether you can succinctly describe how an lbo model is put together and what the important parts are. This question is asked to make sure that any candidate joining the private Equity Firm understands.
Well, how a buyout works essentially this explanation should link the purchase price with the returns expected. It can be explained in many different ways. The candidate was able to concisely summarize the mechanics of an lbo model without getting lost in details. The candidate could have gone an extra step and explain some more about where their assumptions came from and the use of debt in the capital structure, but that may make the answer overly long.
