Leveraged Buyout (LBO) models

What is a Leveraged Buyout (LBO) and what is LBO analysis?

The leveraged buyout model (LBO) is the act of acquiring a company or a section of a company mostly funded by borrowed money, so that the cost of acquisition can be met. The acquiring company’s assets along with the assets of the target company most often serve as collateral for the loan(s). Hence, this allows the acquiring company to make large acquisitions without having to use a huge amount of financial capital.

The Leveraged Buyout (LBO) process works in two major steps. First, the new investors (the acquiring company) form a new corporation, specifically for the acquisition of the target. Secondly, the target becomes a subsidiary of the new corporation or both entities merge.

LBOs can either be a public company bought by a private-held entity, spin-offs (public or private corporations selling of elements of their business to gain cash) or private deals between private entities.

More about types of LBO transactions here

When is a Leveraged Buyout (LBO) analysis used?

Given the need for a positive return on investment on such an operation, a thorough LBO analysis is often needed and undertaken by the acquiring firm. The LBO analysis enables to:

1- Compute the highest possible purchase price for a target company, that can be afforded by the prospecting acquiring firm according to certain leverage (debt) levels and other returns on equity parameters.

2- Get an idea of the leverage and equity characterising a possible LBO transaction for a given purchase price.

3- Determine the minimum valuation acceptable for an LBO firm looking to acquire the target company. As LBO transactions are often carried out in the absence of strategic buyers, the firm should only accept possible transactions that give an expected return on equity higher than the LBO firms hurdle rate.

All of this is done through complex LBO Models in Excel often drafted by financial modelling experts for the acquiring firm.

How can I learn about the mechanisms of a Leveraged Buyout LBO Analysis?

LBO analysis is carried out by LBO firms, private equity and investment banking firms using a number of financial tools, and step-by-step methodologies.

To learn the mechanisms of the LBO analysis you can decide to approach to tackle the issue in multiple ways. If you have some time available, you can decide to take a course (online or offline) on the topic so that you can get a deep and broad understanding of the subject. If you would like to learn on the job, you can also apply for a job in an LBO firm as an analyst where you will have the opportunity to learn from the best professionals using proven methodologies.

Where can I find Leveraged Buyout LBO Models in excel as examples?

If you would simply like to find a tool to help you out in an LBO transaction, or simply to understand the steps and methods, you can check the LBO models published below in the Eloquens Catalog and which are very useful Leveraged Buyout Examples. These LBO models are drafted by some of the best professionals, academics and experts on market and are ready-to-use in LBO analysis and to apply. Good luck!