When inserting an LBO valuation into a football field graph; how do you get to the lbo share price range (min and max)?
It doesn't make sense to me to enter the entry equity value divided by # of shares since the capital structure is mostly made out of debt, do enter the exit equity value?
I can't wrap my head around this, also, do I just look at IRR when deciding if an LBO would be profitable, or does the current share price imply and weigh in on anything?
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First of all, I've only made enterprise value football fields instead of equity value. Mainly because my bridge would include more than just financial debt. Would have a corresponding share price next to it.
Secondly, you talk post-deal capital structure, while # of shares suggests you are looking at a listed company. You pay EV minus debt to shareholders, so they want to know what they get per share. After the share the owner could decide to cancel all but 1 share, so # of shares then isn't important anymore.
LBO is a model that determines your ability to pay. Inputs are the forecast (I/S, capex, working cap), the capital structure post deal, and potentially exit multiple (often falsely assumed to be equal to entry multilpe).
You solve for 25% IRR, 2.5x MM over 5 year time horizon by changing entry multiple.
Current share price compared to what you can pay based on LBO is what matters ultimately.
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