How to check an LBO model efficiently
I am a newly promoted associate (ignore title) and I was wondering if anyone could share tips on how to check efficiently an LBO model that an Analyst did? Any tips is much appreciated - At the moment I am checking cell by cell and it takes forever / it is not efficient at all
Think of sanity checks. For example, what kind of MOIC achieves a specific IRR in 3, 5, and 10 years. Write these down or commit them to memory.
Then, look at the MOIC, look at the exit period, and see what IRR is being spit out. If it is in the ballpark of your heuristics that you have committed to memory, it is likely correct. If it is off, well, then you go cell by cell.
Just something that works for me (albeit I use this for most things, I don't do too many LBOs admittedly).
Second this. I still check valuations and the first thing I do is check the IRR and MM.
I've pretty much memorised the table by now so I can quickly see if something is fishy.
Also agree with below on checking major items and transaction assumptions first.
I would check major line items and then see if the results give you what you are looking for -> I mean the only way to truely make sure its okay is to check every everything, I think the amount of checking is also dependent on the trust you have in your analyst.
Man I have 0 trust
Biggest issues I’ve seen are debt schedule calcs and formulas. Also can’t forget about the 30% limit on interest expenses deduction for cash tax purposes.
Start by checking sources and uses (e.g., how is entry EV calculated? Is this the correct minimum cash balance? Is sponsor equity reasonable?
Once you iron out the mechanics and ensure everything is flowing correctly, do a sanity check on assumptions. What’s the spread on the TL (2%? in this market? lol).
It takes me ~20-30min to get through a relatively simple LBO (~2 tranches) and a lot longer for more complex ones. Key here is that you need to be good at the task itself before you are able to provide thoughtful comments. Assuming you know the ins and outs of an LBO, you’ll get faster at checking as your get more reps.
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