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LBO model: money multiple, IRR and value-creation bridge of a leveraged buyout (illustrative company)

ToolLBO Model
SourceIllustrative case computed by the tool from closed forms; background in Kaplan, S. N., and Strömberg, P. (2009), "Leveraged Buyouts and Private Equity", Journal of Economic Perspectives, Vol. 23, No. 1, pp. 121–146. No published worked example is reproduced.
LevelUndergraduate

Problem

A buyer pays 10 times EBITDA for a company with EBITDA of 100 and borrows 5 times EBITDA at 8 % interest. EBITDA grows 5 % a year, 60 % of it is left as cash after tax, capital spending and working capital, and all cash left after interest repays debt. The company is sold after 5 years at 11 times EBITDA. What does the buyer earn on its equity, and where does the gain come from?

Inputs to Enter

  • EBITDA 100; purchase multiple 10; debt 5 × EBITDA at 8 %; EBITDA growth 5 % a year; 5 years held; exit multiple 11; cash conversion 60 %
  • Advanced defaults: subordinated debt 1 × EBITDA at 11 %, senior repayment 1 % a year with a cash sweep, fees 2 % of price and 2 % of debt, minimum cash 10, management pool 10 %, recapitalisation of 1 × EBITDA in year 3
Open the LBO Model tool (loaded with this example)

Answers

  • Price 10 × 100 = 1,000; debt 500; equity invested 500
  • Year 1: EBITDA 105.00, interest 0.08 × 500 = 40.00, cash for debt 0.6 × 105 − 40 = 23.00, debt 477.00; debt at the end of years 2 to 5: 449.01, 415.47, 375.78, 329.27
  • Exit: EBITDA 127.63, enterprise value 11 × 127.63 = 1,403.91, equity 1,403.91 − 329.27 = 1,074.64
  • MOIC 1,074.64 / 500 = 2.15; IRR 2.149^(1/5) − 1 = 16.54 % a year
  • Bridge: EBITDA growth 276.28, change in multiple 127.63, debt paydown 170.73, total 574.64 = the gain; IRR 13.6 % at an exit multiple of 10 and 19.2 % at 12; 15.3 % with 4 × debt and 18.3 % with 6 ×
  • Advanced defaults: equity invested 442.00, dividend 115.76 in year 3, equity at exit 785.09, buyer receives 810.76: MOIC 1.83, IRR 13.74 % by Newton's method (12.90 % from the single-payment formula)

Notes

The tool's default inputs are this case; press Submit. Every figure is illustrative, so the result describes these inputs and is not a statement about any company or deal. The numbers are the tool's own calculation, checked by hand, against closed-form limits and against an independent numpy / scipy model (test_lbo_model.php). A calculator for education and analysis, not investment advice.