Practice
LBO · Conceptual
How do you select the Purchase Multiple and Exit Multiple differently for a public LBO target versus a private one?
Why does a Management Rollover effectively reduce the amount the PE firm has to fund, even though the headline Purchase Enterprise Value doesn't change?
What makes an industry more or less appealing as an LBO target, beyond the target company itself?
What are the three main exit strategies in an LBO, and why do PE firms overwhelmingly prefer M&A exits?
What's the "true price" of a public company LBO, and why bother building a Sources & Uses schedule at all?
Why might a PE firm use Preferred Stock to fund part of a deal, even though it's more expensive than any form of Debt?
How does a Management Rollover affect the Sources & Uses schedule in an LBO?
What IRR and MoM multiple do PE firms typically target, and how does a longer average holding period change the targeted multiple?
Walk me through a basic LBO model.
When reviewing a CIM on a potential LBO candidate, what's the efficient order to work through it, and why?
Rank the assumptions that impact an LBO's returns the most, and explain why.
How does a Net Operating Loss (NOL) affect an LBO's cash flow?
Why do LBO models focus on EBITDA and TEV/EBITDA rather than Free Cash Flow-based or Equity Value-based multiples for the purchase and exit assumptions?
In a cash-free, debt-free LBO of a private company, what happens to the target's existing Cash and Debt?
Why does an interest rate floor matter for a floating-rate Term Loan, and how is it typically structured?
How does an LBO valuation differ from a DCF valuation, even though both are based on projected cash flows?
How does an increase in purchase price multiple affect LBO returns, all else equal?
Why does a Stub Period require using XIRR instead of the standard IRR function?
How does a Working Capital target at deal close affect what the PE firm pays versus what selling shareholders receive?
What is a dividend recapitalization (dividend recap)?
What's the single most important factor in determining whether a company is a good LBO candidate?
Why do the less risky, lower-yielding tranches of Debt, like Term Loans, tend to have amortization, while riskier tranches like Subordinated Notes don't?
Walk me through the 5 basic steps of building an LBO model.
A company can grow by selling more units, raising prices, or cutting costs, all by the same percentage. Which improves EBITDA the most, and why?
Why would a PE firm use a Shareholder Loan instead of straightforward Common Equity?
Why is Stock never available as a Source of Funds in a leveraged buyout, unlike in a normal M&A deal?
In a sources & uses table, what typically goes on each side?
Why doesn't using leverage in an LBO actually 'increase' returns?
What's the difference between IRR and MOIC?
Why might a company's Free Cash Flow in a given year differ from its Cash Flow Available for Debt Repayment in that same year?
How does increasing leverage (debt) in an LBO affect equity returns?
Why might a PE firm choose more expensive Subordinated Notes over cheaper Term Loans?
How can a PE firm reduce its downside risk in an LBO, beyond simply using less Debt?
Should you add back Stock-Based Compensation when calculating Free Cash Flow in an LBO model?
How is Free Cash Flow in an LBO model different from Free Cash Flow in a DCF?
Why do you use the company's beginning-of-period Debt balance, not the average balance, to calculate Interest Expense in an LBO model?
What makes a company a good LBO candidate?
What do the Debt/EBITDA, EBITDA/Interest, and FCF Conversion ratios tell you about how an LBO is performing?
How do you attribute EBITDA growth between Volume and Pricing effects in an LBO model, and why does the distinction matter?
Why might a PE firm reject a deal even when the IRR and MoM multiples look favorable in every case?
Why might a PE firm recommend a deal even when the numbers look underwhelming across the board?
Why might a sponsor prefer more debt tranches (e.g., a term loan plus high-yield bonds) instead of a single loan?
Would a PE firm rather achieve a high IRR or a high MoM multiple in a leveraged buyout?
What could trigger Multiple Expansion in an LBO, and is it a defensible assumption to underwrite a deal to?
Why is stable, predictable cash flow more important than growth potential for a typical LBO candidate?
If a PE firm splits its investment 1/3 Preferred Stock (with a 12% coupon) and 2/3 Common Equity, and the Common Equity achieves a 25% IRR, does the blended return end up above or below 25%? Why?
Why does Purchase Price Allocation matter less in an LBO model than it does in a normal M&A deal?
What's the one place Purchase Price Allocation still matters in an LBO, despite generally mattering less than in an M&A deal?
Between an extra dollar of EBITDA and an extra dollar of Debt paydown, which is more valuable to a PE firm's returns, and why?
How do you determine how much Debt a PE firm might use in an LBO, and how many tranches to include?
If the exit multiple is lower than the entry multiple, can an LBO still generate strong returns? How?
How do Legal/Advisory Fees and Financing Fees get treated differently on an LBO's Balance Sheet?
How can you estimate the interest rate on a company's Debt in an LBO if there's no comparable Debt data available?
What does the 'tax shield' from Debt mean in an LBO, and how big of an impact does it actually make?
Why do cash flow sweeps typically apply only to certain Debt tranches, like Term Loans, and not others, like Subordinated Notes?
Why is a floating interest rate more common on Secured Debt than on Unsecured Debt in an LBO?
What's the practical difference between a Revolver draw and issuing new Term Loan Debt when a company needs extra financing mid-year?
Why do call premiums on Subordinated Notes push a PE firm toward a longer holding period?
Why isn't the private equity firm itself on the hook for the Debt used to fund an LBO?
How does an Earn-Out affect a PE firm's IRR in an LBO?
Why does every LBO model need a Minimum Cash assumption?