Model a leveraged buyout in a minute: sources and uses, a year-by-year cash waterfall with mandatory repayments and a cash sweep, and the IRR and multiple of money at exit.
Calculating…
A leveraged buyout buys a company with a small amount of equity and a large amount of debt, uses the company's own cash flow to repay the debt, and sells it some years later. The return to the equity investor comes from three places: growth in profit, repayment of debt, and any change in the valuation multiple.
The purchase price is entry EBITDA times the entry multiple. Fees are added. Debt funds part of it; sponsor equity is the remainder.
Mandatory repayments come first. Only the cash left after them can be swept against the second loan. Anything left once that loan is repaid stays as cash and reduces net debt at exit.
Interest is charged on the average of the opening and closing balance, which makes interest and the sweep depend on each other. The calculator solves that loop by iteration.
Over the life of the deal, the cash the business generated must equal the debt it repaid plus the cash it built up. If a model repays more debt than the business produced in cash, the returns are overstated. This calculator shows that reconciliation under every result.
Private equity sponsors have typically targeted an IRR of around 20% or more on a five-year hold, which is roughly a 2.5x multiple of money. What is achievable depends on the entry price, the cost and amount of debt, and how much profit actually grows.
A loan term that requires surplus cash to be used to repay debt early. In this calculator the cash left after the mandatory repayments each year is swept against the second loan until it is repaid.
Because it is the easiest place for an LBO model to go wrong. If mandatory repayments are not deducted before the sweep, a model can repay more debt than the business generated in cash and overstate the return. The reconciliation shows cash generated against debt repaid and cash built up, so you can see that they agree.
A revolving credit facility, minimum cash, financing fees amortised over the loan life, management rollover and interim dividends. Capex and working capital are driven by EBITDA rather than revenue. It is a first-pass returns model, not a full deal model.
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