The book Modeling Leveraged Buyouts – Simplified is available as an Amazon Kindle edition! A leveraged buyout (LBO) is the acquisition of a company by a private equity firm or a group of investors using a significant quantity of debt or leverage. It is very similar to buying a house using a combination of a down payment and a mortgage and then using the rent from that house to repay the mortgage. The primary purpose of this book is to teach you how to model an LBO transaction. We jump right into building a simple LBO model and start with the foundations of model building.
Who is this book for?
Modeling Leveraged Buyouts – Simplified is for MBA, CFA, or undergraduate finance students interested in understanding and modeling leveraged buyouts (‘LBO’). This book is also helpful for financial executives and others interested in understanding and modeling LBOs. It is a wonderful resource for students or professionals interviewing for jobs in the private equity, investment banking, or hedge fund industry because it will teach you how to build a basic LBO model in 1-2 hours.
This book assumes that the reader is familiar with basic finance and accounting concepts. For example, the reader is expected to know the structure of an income statement, the meaning of the term working capital, internal rate of return (IRR), and multiples. The reader is NOT expected to be an expert in Microsoft Excel but has to be reasonably familiar with Microsoft Excel.
No two LBO transactions are exactly alike. Each LBO transaction will have unique features, characteristics, and structure. This book will teach you how to build a simple LBO model. Once you can confidently build a simple LBO model, you can add many bells and whistles to reflect the numerous specifics of the LBO transaction you are considering or modeling.
Modeling Leveraged Buyouts – Simplified is based on Senith Mathews’ experience tutoring students and executives in financial modeling over ten years and building models as a management consultant with Arthur Andersen and Mercer Management Consulting (now Oliver Wyman). Modeling Leveraged Buyouts – Simplified narrowly focuses on modeling leveraged buyouts, given the surge in interest in LBOs.
The first part of Modeling Leveraged Buyouts – Simplified (chapters 1-5) walks you through building and analyzing an LBO model step by step. The first chapter of the book lays the foundations of the LBO model, outlining the basic principles, components, and structure of an LBO model. The second chapter lists and describes the ingredients of an LBO model. This chapter covers the background and assumptions required to build an LBO model. The third chapter of the book shows you how to build the heart of an LBO model: the cash flow projections. It is the cash flow projections that drive investment returns and performance. The fourth chapter of the book teaches you how to develop the output of an LBO model. Here we look at how to compute the key metrics in an LBO transaction. You will see how a project’s returns differ from the private equity investor’s returns and how a project may give poor returns, but the private equity investor generates huge returns from the same LBO transaction. The fifth chapter of this book teaches you how to analyze the LBO model you have just built. We will show you why and how sensitivity analysis is done. We also study how an LBO will create value and teach you how to quantify the value generated by the different drivers of value creation in chapter 5.
The second part of Modeling Leveraged Buyouts – Simplified addresses a few additional topics. Chapter six outlines formatting guidelines to make your model look professional. Chapter seven lists the Microsoft Excel functions used in the LBO model. We believe that if you can confidently build this model, you can add the numerous features you will encounter in an LBO transaction. Chapter eight gives you a list of additional features that can be built on top of this LBO model if a transaction that you are modeling features them.
We do not stop there! If you have learned to model an LBO transaction, we are sure you will be on the lookout for companies you can do a leveraged buyout on. You could buy a firm yourself or have a list of potential LBO targets to impress a potential interviewer with. We teach you how to identify potential LBO targets in the epilogue.
How to use this book
Modeling Leveraged Buyouts – Simplified is built on our modeling boot camp experience, so it is best you adopt a hands-on boot camp attitude as you read this book to maximize your learning from this book. You should be confident of building an LBO model on your own in 1-2 hours after working through this book. You should read this book at least twice to master modeling leveraged buyouts.
Your first read is meant to give you a quick overview of the entire process. You should follow the model spreadsheet as you progress through the book. Read each section one by one. Once you have read a section, review the corresponding region in the Microsoft Excel model. Change the relevant input assumptions to see how that section changes. Dig into each cell of the Microsoft Excel model row by row so you understand the formula and relationships section by section.
Your second read is when you should open up a blank workbook and build the exact LBO model yourself. We recommend that you re-read the book from the beginning or from Chapter 2. As you re-read each section re-create that section in a blank workbook. Begin by setting up the same input assumptions and build the LBO model section by section. Check each section of your model and proceed to the next section only after you are sure it reflects the sample model. Your final model should reflect the sample LBO model when you are done. Change the relevant input assumptions in your LBO model to check that the model returns reflect the changes in the book’s model.
This should give you the confidence to model an LBO transaction on your own. Now you are ready to tackle the case studies provided. We recommend you work on the case studies with a friend or a tutor so that you get instant feedback. Good timely feedback boosts your learning process tremendously.
Or Join the LBO Modeling Bootcamp
Attend a 2-hour boot camp where you start on a blank Microsoft Excel sheet and build out a basic LBO model. Get a hands-on experience where you gain confidence in doing your own LBO model from scratch.
Email us at care@graduatetutor.com with any questions or clarification.
Epilogue: Finding Ideal LBO Candidates
After you have learned how to model an LBO transaction, we are sure you will be on the lookout for companies you can do a leveraged buyout on. You could buy a firm yourself or have a list of potential LBO targets to impress a potential interviewer with. We teach you how to identify potential LBO targets in the epilogue. It is time for you find ideal candidates to do an LBO on!
How will you find ideal candidates to evaluate the feasibility of an LBO? There are no formulae or rules. It really depends on your point of view and circumstances as much as the target firm’s circumstances. An ideal candidate for a leveraged buyout has many of the following characteristics:
- Low existing debt loads;
- A multi-year history of stable and recurring cash flows (mature industries such as retailing, textiles, food processing, apparel, and soft drinks make excellent targets)
- Hard Assets such as property, plant and equipment, inventory, receivables that may be used as collateral for secured debt with lower interest rates;
- The potential to make operational improvements to the firm to boost cash flow;
- Excess cash or unused assets that can be sold to generate cash.
- Up-to-date infrastructure so that the buyers do not need to sink in significantly more capital.
Good luck. Enjoy the hunt. Enjoy the adventure!
Please feel free to email us at care@graduatetutor.com with questions, comments and feedback. We look forward to hearing from you.
Check out an LBO model of Elon Musk’s leveraged buyout of Twitter. Will/can he make money? If yes, how? What growth rates/operating margins does Twitter need to break even?
Here is the LBO model. Put in your own assumptions. Play with it and draw your own conclusions!
Read on or join the workshop if you want to learn how to build an LBO model in 60 minutes or less.