Knowledge Base: Leveraged Buyouts and LBO Model Tutorials

Leveraged buyouts (“LBOs”) refer to control transactions in which a private equity firm acquires a company using a combination of Debt and Equity (similar to a down payment and mortgage for a house), operates the company for several years, and then sells it for a profit in the future.

LBOs became popular in the 1980s, when private equity was just starting out, and PE firms could easily find mismanaged companies with inefficient capital structures.

Over time, PE firms shifted their focus away from “financial engineering,” or using high Debt loads to acquire companies, and into multiple expansion and operational improvements.

In other words, while they still used Debt to fund leveraged buyouts, they also aimed to make the acquired companies more valuable and grow their revenue and profits by expanding into new markets and geographies and improving overall efficiency.

The key concepts in leveraged buyouts include walking through a simple LBO model, calculating the returns (the “internal rate of return” and the “cash-on-cash multiple”), and setting up a simple Debt schedule with support for the Debt repayment and possible Revolver draws to meet cash flow shortfalls.

We present below various LBO modeling tutorials and samples from our courses and YouTube channel: