LBO returns
Entry leverage, five years of deleveraging and an exit, split into growth, multiple expansion and debt paydown.
Sponsor equity at entry ($mm)
$540
Exit equity value ($mm)
$1,381
Money multiple
2.6x
IRR
20.7%
Bridge check (must be zero)
$0
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| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| 1 | LBO returns model | |||||
| 2 | Entry, deleveraging, exit. Watch how the money multiple moves with leverage and multiple expansion. | |||||
| 3 | – | – | – | – | – | – |
| 4 | Entry | – | – | – | – | – |
| 5 | Entry EBITDA ($mm) | $120 | – | – | – | – |
| 6 | Entry multiple (EV/EBITDA) | 9.0x | – | – | – | – |
| 7 | Debt / EBITDA at entry | 4.5x | – | – | – | – |
| 8 | Interest rate on debt | 7.5% | – | – | – | – |
| 9 | EBITDA growth (annual) | 7.0% | – | – | – | – |
| 10 | Cash conversion (FCF before interest / EBITDA) | 60.0% | – | – | – | – |
| 11 | Tax rate | 25.0% | – | – | – | – |
| 12 | Exit multiple (EV/EBITDA) | 9.5x | – | – | – | – |
| 13 | – | – | – | – | – | – |
| 14 | – | – | – | – | – | – |
| 15 | Enterprise value at entry ($mm) | $1,080 | – | – | – | – |
| 16 | Debt at entry ($mm) | $540 | – | – | – | – |
| 17 | Sponsor equity at entry ($mm) | $540 | – | – | – | – |
| 18 | – | – | – | – | – | – |
| 19 | – | – | – | – | – | – |
| 20 | Projection, 5-year hold ($mm) | – | – | – | – | – |
| 21 | – | 2026 | 2027 | 2028 | 2029 | 2030 |
| 22 | EBITDA | $128 | $137 | $147 | $157 | $168 |
| 23 | Interest expense | ($41) | ($37) | ($33) | ($28) | ($23) |
| 24 | Cash flow before interest | $77 | $82 | $88 | $94 | $101 |
| 25 | Debt repayment | $47 | $55 | $64 | $73 | $84 |
| 26 | Debt, end of year | $493 | $439 | $375 | $302 | $218 |
| 27 | – | – | – | – | – | – |
| 28 | – | – | – | – | – | – |
| 29 | Exit | – | – | – | – | – |
| 30 | Exit EBITDA | $168 | – | – | – | – |
| 31 | Exit enterprise value | $1,599 | – | – | – | – |
| 32 | Less: remaining debt | ($218) | – | – | – | – |
| 33 | Exit equity value | $1,381 | – | – | – | – |
| 34 | Money multiple (MoM) | 2.6x | – | – | – | – |
| 35 | IRR | 20.7% | – | – | – | – |
| 36 | Rule of thumb: 2.0x in five years is about a 15% IRR. | |||||
| 37 | – | – | – | – | – | – |
| 38 | – | – | – | – | – | – |
| 39 | Value creation bridge ($mm) | – | – | – | – | – |
| 40 | EBITDA growth | $435 | – | – | – | – |
| 41 | Multiple expansion | $84 | – | – | – | – |
| 42 | Debt paydown | $322 | – | – | – | – |
| 43 | Total equity gain | $841 | – | – | – | – |
| 44 | Check vs. exit minus entry equity | $0 | – | – | – | – |
Drills on this model
Answer out loud first, then change the cell and see how close you were.
- 1.Take entry leverage from 4.5x to 6.0x. What happens to the money multiple, and what happens to the risk you just took?
- 2.Set the exit multiple equal to the entry multiple. How much of the return was multiple expansion?
- 3.Find the EBITDA growth rate that produces a 2.5x money multiple with no multiple expansion.
- 4.Cut cash conversion to 40%. Which part of the value creation bridge shrinks, and by how much?