How to Build an LBO Model from Scratch: A Step-by-Step Guide
A detailed guide to building a leveraged buyout (LBO) model, perfect for interview prep and on-the-job success.
What is an LBO Model?
An LBO model is used to evaluate a potential leveraged buyout transaction, where a company is acquired using a significant amount of borrowed money.
Step 1: Assumptions
Start by setting up your transaction assumptions, including the purchase price, financing structure, and exit multiple.
Step 2: Sources & Uses
Build a sources and uses table to show where the money is coming from and where it's going in the transaction.
Step 3: Pro-Forma Financial Statements
Create pro-forma income statement, balance sheet, and cash flow statement for the company post-acquisition.
Step 4: Debt Schedule
Model out the changes in debt and interest payments over the life of the investment.
Step 5: Returns Analysis
Calculate the internal rate of return (IRR) and multiple on invested capital (MOIC) for the financial sponsors.