Structure and Financing LBO| Valuation Methods| Financial Modeling Build-up of Revenue| Cost Sheet| Equity Schedule
Overview of the LBO
What you’ll learn
- Determination of the price of purchase as well as the amount of equity and debt.
- The income statement projections are built on the basis of the assumptions for revenue as well as for expenses.
- Calculation of the “Free Cash Flow” is done along with the cash that is available for the repayment of debt.
- The debt schedule is completed and the mandatory as well as the optional repayments are determined.
- The debt schedule is then linked to the cash flow statement and also to the income statement.
- The investor returns are then calculated and the sensitivity tables are created.
- The various things that you will be learning as a part of this course consist of the topics related to build-up revenue and cost sheet.
- It will also be discussing about the working capital management, depreciation along with amortization, linkages to the financial statements.
- the shareholders’ equity schedule, schedule of debt and also analysis of sensitivity and IRR..
Course Content
- Introduction –> 2 lectures • 13min.
- Examples –> 4 lectures • 19min.
- Structure and Financing LBO –> 2 lectures • 14min.
- Advantages and Disadvantages –> 1 lecture • 5min.
- Valuation –> 7 lectures • 41min.
- Financial Modeling –> 10 lectures • 1hr 17min.
Requirements
Overview of the LBO
An LBO model of leveraged buyout shows what all takes place when a company is acquired by a private equity firm by using a combination of equity or cash along with debt which is then sold off within a period of 3-5 years. By taking such a step, the aim of the private equity firm is to earn a return of 20 -25 percent which is far in excess of the “historical average annual return” in case of the stock markets. The leveraged buyouts are more or less same to the normal deals of merger and acquisitions; the only difference is that in a leveraged buyout, the assumption is that the buyer will be selling the target in future.
The working of the Concept of Leveraged BuyOut and LBO Model
There exists a similarity between purchasing a house and leveraged buyout as a combination of down payment as well as a mortgage can be made use of. In the case of both these transactions, there is saving of money as a small amount is put down in cash and the remaining is borrowed. In case of the leveraged buyout, the “down payment” is known as the equity or the cash whereas the “mortgage” is known as the debt. The debt is utilised by the private equity firms for boosting its returns. If everything else is equivalent, it means that if the private equity firm makes use of more leverage or debt, the firm is likely to earn a higher rate of return on the investment that has been made by it.
As far as the real LBO model is concerned, the repayment of debt is made by the companies over a period of time which boosts the returns of the private equity firm even more. The numbers show a significant improvement with leverage due to the following reasons –
- What money is worth today is higher than what it will be worth in future- This means that earning higher amount of money 5 years from now will be great, however, it is much better t=if that same amount of money is saved today because of money’s time value.
- Earning a higher amount of return on a money of a smaller amount is much more easy– It is difficult for the portfolio managers with thousands of crores under management to earn rates of return that are high, however for individual investors who have for example made investments of less than one crore, it is much easier to earn returns that are higher. This is the reason why leverage is used by the private equity firms. It goes on to boost their returns in a significant way by bringing reductions in the upfront investment.
Building a LBO Model
LBO Modeling is a process that can be divided into 8 steps. These steps consist of –
- Determination of the price of purchase as well as the amount of equity and debt which will be required
- The debt tranches are assigned with the repayment percentages, interest rates and percentage totals
- A table of “Sources and Uses” is created for tracking the ways the funds will be used in the deal
- The income statement projections are built on the basis of the assumptions for revenue as well as for expenses
- Calculation of the “Free Cash Flow” is done along with the cash that is available for the repayment of debt
- The debt schedule is completed and the mandatory as well as the optional repayments are determined
- The debt schedule is then linked to the cash flow statement and also to the income statement
- The investor returns are then calculated and the sensitivity tables are created
Ideal Candidates for the Leveraged BuyOut
The “ideal” candidate for the LBO Model should –
- Have cash flows that are stable as well as predictable for repayment of debt
- Be undervalued with respect to the industry peers (lower price of purchase)
- Be a business that is associated with low risks (repayment of debts)
- The need for ongoing investments like CapEx should not be much
- Have the capability of cutting costs and increasing margins
- Have a management team that is strong
- Have a solid asset base for using as collateral for debt
Of all the points the first one is of utmost significance as nobody will lend to a company as well as finance an LBO model if the cash flow of the company is unpredictable.
LBO Modeling Course Description
The course of the LBO Modeling is divided into various sections as well as subsections in the following way –
LBO Analysis
- Overview
- Assumptions for the transaction
- Debt Assumptions
- Sources as well as uses
- Populating of the historical values
Build-up of Revenue
- Revenue Build-up
Cost Sheet
- Calculations of the cost sheet
Management of Working Capital
- Management of working capital
- Management of working capital
- Ratios as well as Assumptions
Depreciation and Amortization
- Capex – Base Equation
- Depreciation Schedule
- Calculation of Depreciation
- Schedule of Amortization
Linkages to Financial Statements
- Linkage of the income statement
- Linkage of the balance sheet
- Linkage of the cash flow statement
Equity Schedule of the Shareholders
- Equity Schedule of the Shareholders
Schedule of Debt
- Schedule of Debt
- Completion of the Missing Links
IRR and Sensitivity Analysis
- Calculation of IRR
- Sensitivity Analysis
What are the requirements/pre-requisites?
The main requirements for the LBO Modeling course consist of the following –
- A computer that has an internet connection
- Basic introductory knowledge of working in excel
- Basic introductory knowledge related to accounting
- A general exposure to corporate finance will be of help although it is not essential to have such an exposure
Target Audience for this LBO Model Training
The target audience for the training of LBO Modeling includes the following –
- Novice students who have interest in pursuing a career in the financial sector
- Working Professionals
- Any other person who may have interest in undertaking the LBO Modeling course
LBO Model FAQs – General Questions
- I am new to this course of LBO Modeling. Will I face difficulties in learning about its various concepts?
No, you will not be facing any difficulties in learning about the various concepts even though you are new to LBO Modeling. The reason for this is that the course has been explained right from the beginning which does not require you to have any prior knowledge related to the subject. All the concepts will be well explained through videos as well as practical files by our team of experts. Relevant examples have also been provided for making the learning more practical.
- What are the various things that I will be learning from this course?
The various things that you will be learning as a part of this course consist of the topics related to build-up revenue and cost sheet, It will also be discussing about the working capital management, depreciation along with amortization, linkages to the financial statements, the shareholders’ equity schedule, schedule of debt and also analysis of sensitivity and IRR. The LBO analysis of “American Eagle Outfitters” will also be discussed as a part of this course.
- What are the career options that will be available to me after pursuing this course?
There are a number of career options in the financial sector that will be available to you after pursuing this LBO modeling course. LBO Modeling is used widely in the private equity firms and also in the investment banks. A lot of questions are also asked in the various financial interviews on LBO Modeling and its applications.