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?
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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"
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