Margin of Safety in LBO Model
Is it possible to calculate a Margin of Safety for LBO purposes, to assess whether there is a sufficient amount of margin of safety to invest in the company? If so, how would I calculate it? I know it would be expected growth/sales minus break even, but would this mean breakeven with regards to IRR or just sales vs. COGS?
Margin of safety is subjective and dependent upon the investment. Almost all LBOs are intermediated and as such you are rarely able to acquire a profitable company at a meaningful discount to intrinsic value. As such, in practice, PE firms just run multiple cases and pursue investments/capital structures that have an attractive distribution of outcomes across all likely cases. I have done a couple of proprietary deals where a growing company could literally shrink during my period of ownership and still service debt/generate a positive return to the equity, but such deals are total unicorns.
In a more distressed situation you might derive a margin of safety based on liquidation value or a low multiple of the profitability from, for example, a particular business segment that is obscured by other unprofitable operations. But those aren't really "LBOs"
Maxime at aut itaque illo. Molestias deleniti ea ducimus voluptas dignissimos corrupti accusantium. Consequatur est cumque excepturi tenetur et sed.
Maiores non quae quia quam molestiae et. Natus explicabo at sunt quis deleniti aperiam deserunt nisi. Eos tenetur minima dolorem minima ut.
Esse unde quas qui eos in debitis. Sint cupiditate nemo aperiam tempora et. Occaecati eum illum non hic. Officiis rerum explicabo in eaque rerum voluptas nulla. Qui ipsum consequatur sed amet ipsum nesciunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...