LBO Model

Cover

Professional cover with deal name, sponsor, target company, and key return metrics. Covers deal identification, key return summary (irr, moic) and model date and version.

Executive Summary

One-page overview of the entire transaction including entry, operating plan, and exit assumptions. Covers transaction overview, sources and uses summary, key operating metrics and return summary by scenario.

Assumptions

Central assumptions page driving entry valuation, operating performance, capital structure, and exit. Covers entry multiple and price, revenue growth and margin targets, debt structure assumptions and exit multiple and timing.

Historical Income Statement

Clean historical P&L for trend analysis and projection anchoring. Covers 3-5 years of historical data, revenue and margin trends, ebitda bridge and normalized adjustments.

Historical Balance Sheet

Historical balance sheet data for working capital analysis and asset base understanding. Covers asset and liability detail, working capital components, existing debt structure and net asset position.

Historical Cash Flow

Historical cash flow statements for understanding cash generation patterns. Covers operating cash flow history, capex patterns, cash conversion metrics and dividend history.

Working Capital

Working capital projections based on days outstanding assumptions. Covers dso, dio, dpo projections, net working capital change, cash conversion cycle and seasonal patterns.

D&A and Capex

Depreciation and capital expenditure schedules with maintenance vs. growth capex split. Covers depreciation by asset class, maintenance capex requirements, growth capex plans and pp&e roll-forward.

Projected Income Statement

Forward P&L projections reflecting the sponsor's operating plan. Covers revenue growth trajectory, margin expansion path, interest expense from debt schedule and pro forma earnings.

Projected Balance Sheet

Forward balance sheet with new debt structure and equity post-acquisition. Covers new capital structure, goodwill and intangibles from acquisition, debt balance roll-forward and equity value progression.

Projected Cash Flow

Forward cash flow statements showing cash available for debt repayment. Covers operating cash flow, free cash flow derivation, cash available for debt service and cash sweep mechanics.

Debt Schedule

Detailed multi-tranche debt schedule with amortization, interest, and covenant tracking. Covers senior secured term loan, revolving credit facility, subordinated / mezzanine debt, pik toggle notes, mandatory and cash sweep amortization and leverage and coverage ratios.

WACC

Weighted average cost of capital for DCF cross-check valuation. Covers cost of equity (capm), cost of each debt tranche, capital structure weights and blended wacc calculation.

Free Cash Flow

Detailed unlevered and levered free cash flow build for valuation and returns analysis. Covers ufcf for dcf valuation, lfcf for equity returns, cash flow waterfall and debt repayment capacity.

DCF Valuation

Discounted cash flow cross-check using projected free cash flows. Covers ufcf present value, terminal value calculation, enterprise to equity value bridge and implied valuation range.

Sensitivity

Two-way sensitivity tables testing returns under different entry, operating, and exit assumptions. Covers entry multiple vs. exit multiple, ebitda growth vs. exit timing, leverage vs. returns and revenue growth vs. margin sensitivity.

Scenarios

Named scenarios (base, upside, downside, management case) with full return profiles. Covers base case returns, upside with operational improvement, downside with margin pressure and management case comparison.

Comparable Transactions

Benchmarks the deal against precedent LBO transactions. Covers entry multiples comparison, leverage levels benchmark, return profiles of comparable deals and sector-specific deal data.

Error Check

Model integrity validation across all worksheets. Covers balance sheet balance check, cash flow reconciliation, debt schedule integrity and circular reference detection.

Sponsor IRR

IRR: Equity Invested × (1 + IRR)^n = Exit Equity Value

The internal rate of return on the sponsor's equity investment. The primary PE return metric — most funds target 20-25%+.

MOIC

MOIC = Exit Equity Value / Equity Invested

Multiple of Invested Capital. A 2.5x MOIC means the sponsor earned 2.5 times their initial equity check.

Entry Enterprise Value

EV = Entry Multiple × LTM EBITDA

The total acquisition price based on an EBITDA multiple. The starting point for the entire LBO analysis.

Cash Sweep

Sweep = Excess Cash Flow × Sweep %

Mandatory debt repayment from excess cash flow after required payments. Accelerates deleveraging and improves returns.

1.Structure the Transaction and Sources & Uses

An LBO model starts with the deal itself. Define the enterprise value, equity contribution, and debt package. The sources and uses table must balance perfectly — every dollar of purchase price, fees, and cash to the balance sheet must be funded by a corresponding source (equity check, term loans, bonds, mezzanine, or seller financing). The capital structure you design here drives every downstream calculation. A typical LBO uses 60-70% debt and 30-40% equity, but the optimal structure depends on the target's cash flow stability, asset base, and lender appetite.

2.Build the Operating Model with Conservative Projections

The operating model should project revenue, EBITDA, and free cash flow for the hold period (typically 5-7 years). LBO modeling requires conservatism — debt covenants leave no room for optimistic misses. Build revenue from identifiable drivers (volume, price, new contracts), model operating expenses with attention to fixed vs. variable cost structure, and carefully project capital expenditure needs. The quality of your FCF projection determines whether the debt package is serviceable and what equity returns are achievable.

3.Model the Debt Schedule and Cash Sweep

The debt schedule is the mechanical heart of an LBO model. Each tranche has its own terms — interest rate (fixed or floating), amortization schedule, maturity date, and priority. Model mandatory debt repayment first, then apply excess cash flow to the most expensive debt through a cash sweep mechanism. Track leverage ratios (Debt/EBITDA) and coverage ratios (EBITDA/Interest) each period to ensure covenant compliance. The speed of deleveraging is a primary driver of equity returns in an LBO.

4.Calculate Returns Across Exit Scenarios

LBO returns come from three sources: debt paydown (the business repays debt using its cash flows, increasing equity value), EBITDA growth (operational improvements increase the business's earnings), and multiple expansion (selling at a higher valuation multiple than the purchase price). Model the exit at multiple EBITDA multiples and at different points in time to understand how returns vary. Compute both IRR (time-weighted) and MOIC (cash-on-cash multiple) — PE investors evaluate both metrics.

5.Sensitize the Key Assumptions

No LBO investment committee will approve a deal based on a single scenario. Build two-way sensitivity tables that show how IRR and MOIC change across combinations of entry multiple vs. exit multiple, EBITDA growth vs. leverage, and revenue growth vs. margin. The downside case matters most — if the fund can still achieve an acceptable return when things go wrong, the deal has a genuine margin of safety. Credit investors will want to see that the debt is serviceable even under stressed conditions.