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7/28/2019 Sams LBO Example PDF
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A Brief LBO Modeling Exercise
This short modeling exercise covers the conventions and leverage benefits commonly seen in LBO
models.
The protagonist of the case was a wholly-owned subsidiary of a large public company with highly
seasonal and cyclical cash flows (we assume flat growth and margins to make the exercise more
straightforward; see Assumptions below for more detail). Students play the role of a private equity firmtasked with determining whether the subject company, given a set of assumptions, meets a required IRR
of 25%.
We have provided an Excel spreadsheet with the pre-labeled tabs and line items needed to find the
investments IRR. The only pre-populated cells are those in Year 0 on the income statement (youll
simply drag these across the five-year investment period; see Assumptions below for more detail). To
complete the exercise, you will need to construct a skinny income statement, cash flow statement,
debt schedule, free cash flow to equity (FCFE) calculation and an IRR table.
PLEASE NOTE: Do not forecast a balance sheet. The tab (pre-populated with the pre-deal balance sheet
data) is only provided as extra credit to give you a chance to model a post-deal balance sheet that
reflects both the new capital structure and the addition of intangibles/goodwill.
Assumptions:
A $100 million purchase price, financed 50% with equity and 50% with debt The debt portion of financing is a term loan that amortizes (straight-line) over a 5-year period
with an interest rate of 10%
No sales growth or margin expansion/contraction (i.e., constant EBITDA throughout the five-year period)
A 35% tax rate A minimum IRR criteria of 25% The company is sold at the end of year 5 at the same EV/EBITDA multiple as that implied by the
purchase price Maintenance capital expenditures equal depreciation in each period No changes in working capital (i.e., ignore working capital for the purpose of the exercise) EXTRA CREDIT BALANCE SHEET ASSUMPTION: 20% of the excess purchase price is allocated to
intangibles with an indefinite life (i.e., no amortization), the rest as goodwill. All liabilities are
paid off on the transaction.
Your goal is to determine whether or not you would buy this company given the assumptions and your
minimum IRR threshold.
HINT: The majority of the cells on each tab should be driven off of the inputs and calculations required
on the first three tabs, namely the Assumptions, Income Statement, and Cash Flow Statement
worksheets.
Good luck!