Paper LBO model

I've heard in some interviews of candidates being asked to construct a paper lbo model, where they are given a bunch of information and have to walk through the LBO math.

Could someone provide an example of how this plays out? What information will you be given, what are you asked to calculate, and what are examples of tricky follow-up questions?

I imagine this wouldn't be too difficult, if you're given a few simple assumptions, asked to calculate FCF, and assume an entry and exit at a certain multiple. Can't imagine this being too hard but wanted to hear from someone who has gone through the interview process. Thanks.

 
Best Response

TA Associates asked me to do this in an interview a few years backs. We mutually agreed on a target company that we both had some familiarity with and then I wrote down LTM revenue on a piece of paper and we talked through assumptions for gross margins, EBITDA margin.

After agreeing on those margins and a 5 year revenue growth CAGR, he then asked me to layer in a new capital structure based on a purchase multiple, market debt multiples. From there you can calc the annual amortization and interest expense and make assumptions around capex, change in working capital, etc.

At this point you essentially have a proxy for annual FCF and a terminal equity value. Then you can calc the cash on cash return and do a rough approximation of the IRR.

The math is the easy part. The true test is walking through all of the assumptions and not missing steps.

 

Did they specifically ask for you to discuss equity returns?

A lbo model is also used to determine debt capacity. Approach it from a debt point of view rather than equity. Taking the projected financials work out both key leverage and coverage multiples to determine if the company is a good credit and can sustain the level of debt.

 
IncapableChimp:

Did they specifically ask for you to discuss equity returns?

A lbo model is also used to determine debt capacity. Approach it from a debt point of view rather than equity. Taking the projected financials work out both key leverage and coverage multiples to determine if the company is a good credit and can sustain the level of debt.

I was asked to do a paper LBO and tell them what the implied MoM at exit would be, so yes. Also I am very familiar with what you are saying but I dont follow how you can calculate this on paper. Do you just mean that using the typical coverage ratio of at least 2.0x, total leverae of no more than 6.0x, etc, use that to determine what leverage could be / if the provided leverage is too much?
 

I understand that...... What are you talking about ? Read my question. That is from the equity perspective.. This is a DEBT fund. It doesn't make sense to talk about equity returns for a debt fund, nor do I understand why they care...

 

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