π° Financial Models
Leveraged Buyout (LBO) Model
An LBO model values a company by simulating what a private equity firm would pay for it. The acquisition is funded primarily with debt (60-80%), with the PE fund contributing equity for the remainder. Over a 5-7 year hold period, the company's free cash flow pays down that debt. At exit, the PE firm sells the company and collects whatever equity value remains after repaying outstanding debt.
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Minutes
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Concepts
+15+30
Read+Quiz
1
Why PE Firms Use Leverage
Leverage amplifies equity returns. If you buy a $1B company with $300M equity and $700M debt, and sell it for $1.5B after paying debt down to $400M:
Exit equity = $1,500M β $400M = $1,100M Entry equity = $300M MOIC = $1,100M / $300M = 3.67x
Without leverage (all equity), MOIC would be $1,500M / $1,000M = 1.5x. Same company, same growth β but leverage turned 1.5x into 3.67x.
The three levers of LBO returns:
- Debt paydown β FCF retires debt, growing equity value even if EBITDA is flat
- EBITDA growth β Revenue growth and margin expansion increase enterprise value
- Multiple expansion β Selling at a higher EV/EBITDA multiple than you bought at (never assume this in your base case)