How to improve returns in an LBO?
An interview questions where I cannot find the answer anywhere..... I believe you can improve returns by finding a company that meets the metrics for an LBO such as
1) Has persistent and positive cash flow
2) You can use the assets in the LBO to help cut losses
3) You use as much debt as possible
Correct me if I am wrong
Assuming all else equal:
Raise the exit multiple
Lower purchase price
Increase leverage
Operational improvements to drive higher EBITDA (e.g., layoffs to decrease headcount).
Higher exit multiple, higher quantum of ebitda (offer a few suggestions), additional leverage, lower interest rate / NWC / capex requirements, dividend recap
1) Lower purchase price. Or structure in some delayed earn-outs. (Will increase IRR, reduces some risk of the acquisition, aligns incentives, etc.)
2) Multiple expansion. Selling at a higher multiple than what you acquired at. Can be as a result of the market, diversifying the platform, high-grading management, improving margins relative to competitors, etc.)
3) Leverage. Higher quantum of debt and/or more attractive interest rate. Obviously, you have to size the debt appropriately for the business.
4) Operational improvements. Driving cost savings. Improving revenue generation.
5) Interim cash inflows. Can be as a result of dividend recaps or generating higher free cash flow to equity.
One thing I haven’t seen so far is bolt-on acquisitions during the hold period to blend down the effective entry multiple.
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