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Steps to LBO Modeling

Learn how to build an LBO model step by step

Steps to LBO Modeling

A leveraged buyout (LBO) is a transaction where a target company is acquired using significant amount of debt. The use of high leverage increases the potential returns on investors’ equity investments in the long-run. An LBO model is usually built in excel to help investors properly evaluate the transaction and realize the highest possible risk-adjusted internal rate of return (IRR). Learn more about leveraged buyout in our LBO Model Course.


LBO Modeling


The following steps are essential to building a thorough and insightful LBO model:



Before building the LBO model, necessary assumptions need to be made on inputs including financing, operating metrics of the business, sources and uses of cash, purchase price allocation, and operating scenarios.

Excel functions and formulas can be used to set up a drop-down list so that different results will be reflected in the later sections (such as the DCF model) as different scenarios are chosen.


Financial Statements

Once all the assumptions are laid out, the Income Statement, Balance Sheet and Cash Flow Statement are constructed and linked using historical data. Supporting schedules such as working capital and depreciation schedules are also built to calculate the corresponding line items on the financial statements.

Forecasting is then performed on the three financial statements based on the assumptions set up.


Transaction Balance Sheet

Before completing the full forecast on the financial statements, a transaction balance sheet needs to be built to show the pro forma balance sheet items after recapitalization. The transaction balance sheet lays out the total adjustments and capital structure of the business after the LBO transaction is completed. The closing pro forma balance sheet will flow back up to the balance sheet section to drive the forecasts.


Debt and Interest Schedules

The debt and interest schedules model the details of all layers of debt and interest payments associated with the LBO transaction, including line of credit, term loans and subordinated debt. With the debt schedules completed, the rest of the linking can be done for the financial statements.


Credit Metrics

The credit metrics evaluate the repayment profile and look at how the company can service its debt obligations, including repayment of principles and interest. Key credit metrics in an LBO model include debt/EBITDA, interest coverage ratio, debt service coverage ratio and fixed charge coverage ratio.




At the end, a DCF model is built with the forecasted data. The free cash flows are then calculated for each of the investor types, which are used to find out internal rates of return (IRR) and net present value (NPV) by investor type.


Sensitivity Analysis, Charts and Graphs

Following the DCF model, sensitivity analysis can be performed to assess how the IRR will be affected when different independent variables change, holding all other assumptions unchanged.

Finally, charts and graphs can be created to present the change in cash flows and the amount of leverage over time.


LBO Model Screenshot


Additional Resource

Want to learn more about leveraged buyout? Check out our LBO Model Course which provides a detailed lesson on how to build an LBO model step-by-step as outlined above.

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Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!