Training · IB-2 · Lesson 10 of 12
Leveraged buyout analysis
The rule
A buyout buys a company mostly with debt, repays it from the business's own cash, and sells it later for equity value that started small.
How an LBO works
A financial sponsor buys a company using a large proportion of debt, typically 40–70% of the purchase price. The company's cash flow repays debt over the holding period. At exit, the sponsor's equity is worth the enterprise value minus remaining debt. Returns come from EBITDA growth, debt paydown and any change in the exit multiple.
What makes a good LBO candidate
Lenders and sponsors want predictable cash flow to service debt.
- ·Stable, recurring revenue and strong market position.
- ·Low capital intensity and modest working capital needs.
- ·Room to improve margins or grow through acquisitions.
- ·A clear set of future buyers for the exit.
A paper LBO
Interviews often include a paper LBO solved without a spreadsheet. Work in round numbers and state assumptions. The point is to show you understand where returns come from.
- Entry: EBITDA $100m × 10x
- EV $1,000m
- Funding: debt 60% / equity 40%
- $600m / $400m
- Exit EBITDA after 5% annual growth
- ≈ $128m
- Exit EV at 10x
- $1,280m
- Debt repaid from cash flow
- $600m → $300m
- Exit equity
- $980m
- Money multiple / IRR
- 2.45x / ≈ 20%
Return drivers
Separate the sources of return: EBITDA growth (operations), multiple expansion (market), and deleveraging (financing). Sponsors increasingly need operational value creation, because cheap debt and rising multiples cannot be relied on.
Rules of thumb
Doubling money in five years is roughly 15% IRR; tripling is about 25%. Two times in three years is about 26%. Knowing these lets you sanity-check any answer quickly in an interview.
Hold onto this
- ·Returns come from deleveraging, EBITDA growth, and multiple change — know which one you are underwriting.
- ·Leverage is sized off cash flow: debt service coverage and net debt to EBITDA, not what the market will lend.
- ·Equity value at exit equals enterprise value less net debt, and the IRR is only as honest as the exit assumption.
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Education, not financial advice. Figures may be simplified for illustration.