Financial Models



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Leveraged Buy Out Model

This is a simple LBO model that can be done on the back of an envelop.

We model a situation where a private equity fund (or another entity) is thinking about buying a target company. Model assumes the following:

  • The PE fund pays a multiple of EBITDA to acquire the target.
  • The PE fund finances this acquisition through a combination of equity and debt.
  • The PE fund has an investment horizon of a few years (typical - 5 to 7 years).
  • At the end of the investment horizon (year n), the fund "exits" at a multiple of the (n+1)th year EBITDA.
  • At exit, the PE fund settles its debt.
  • All the cash flow generated by the target company is reserved to pay off the debt principal.
  • The interest payments are made from the operating cash flows.
  • The return for the PE fund is estimated by looking at the equity that was put in at the time of purchase and the equity at the time of exit.


Model Inputs

Buy Multiple (x EBITDA) x Debt to Equity Ratio %
Weighted Avg Interest Rate on Debt % Exit Multiple (x EBITDA) x
Investment Horizon years Revenues - Year 1
Revenues - YoY Increase % EBITDA Margin %
EBITDA Margin - YoY Change % Annual CAPEX (% of Sales) %
Change in Operating Working Capital (per year) Depreciation per year (assumed constant per year)
Tax Rate % - another solution from Rock Creek Analytics.

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