Hi,
I built a LBO model with 3-4 key variables that can influence return, and after I built the sensitivities around them, each of them show very limited variation. It's not the type of obvious error where they don't change at all (they do change), but varying a growth rate from -2% to 4% for example produce IRR that are very close to each other (think** 2% irr** for -2% input CAGR, 8% irr for 4% input CAGR)
I'm worried that there might be an error in my model but I don't know whats the best way to check it....any recommendations please?
Thanks!
Keeping all else equal, a 6% differential in growth rate should give you close to 6% variance in IRR so that does not sound wrong. The best check is to be familiar with how each lever (ebitda growth, leverage, multiple expansion) affects returns so you can look at the math quickly and tell if something is off.
Thank you so much, and really appreciate the insights!
When you say "The best check is to be familiar with how each lever (ebitda growth, leverage, multiple expansion) affects returns so you can look at the math quickly and tell if something is off." - how can I get familiar with these things please? I hope this is not a stupid question - do I keep building different models? but each model will see different sensitivities right? Thanks!
He is telling you to avoid "garbage in, garbage out" in a nice way. Meaning, if you understand what different EBITDA growth, leverage, and multiples expansion assumptions mean for the fundamental profile of free cash flow and enterprise value then you should be able to quickly tell if your return tables look accurate or not.
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thank you all!
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