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