LBO case study - back to basics!
Hey guys, really silly question but need your help.
I am about to do an LBO case study next week, and even though it's not my first one - I think I still don't know how to get to the price. Do you typically leave the entry price blank and model the whole thing out based on say 25% IRR and then use goal seek to get the entry price? Cause the way I was doing it my whole life was to put some approximate dummy for entry price and then manipulate it until the IRR gets to where I need it to be.
Is the goal seek (setting IRR to 25% and having entry multiple as a variable) the way to do it? Sensitivity tables do the same trick as long as you have some idea in what zipcode the price should land.
In other words - how do you actually derive the price in an LBO?
Again - really sorry for the dumb question, but appreciate some help!
Just to add to that - to model it out you kind of need to know the amount of debt you gonna have but if you find the price in the end of the exercise - how do you even do sources and uses?
Keep it dynamic. Yes, you need to have debt assumptions but they can be LTV/LTC percentages, and fees as basis points, etc. etc. Should not just be a fixed debt amount, if you don't start out with a PP assumption.
When you have an enterprise value, you subtract debt at the end of your LBO investment period to get equity value. Then if you have FDSO, you get price per share.
You have LTM EBITDA and an Entry Multiple for TEV.
Maybe I didn't understand your question right. That's how I did it.
You clearly did not understand his question
There are two main ways to frame it up in my mind:
1. Here are the assumptions made / provided (debt, income statement projections, etc.), and here is what the IRR/MOIC is. Good deal or bad deal, and why?
2. Here are the assumptions you need to believe in order to do the deal (sales grow at x% CAGR, EBITDA margins at y%, buy the company for 8x multiple, etc.)
I think you have the right idea in mind. You should be making debt assumptions based off what is reasonable- what do you typically see in market for senior vs subordinate and look at certain metrics like fixed coverage ratio…for final price, I think you have the right idea. You’re setting the price to get to your target IRR (which could be 20%, 25%, etc.)…obviously, how sensible a price you’re setting depends on your other assumptions.
I’m very new and have an LBO modeling test this week for a generalist fund. What would be a good ballpark of assumptions for debt v. Equity breakdown within purchase price?
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