Part II: Building and Analysis

Building a leveraged buyout model, as with any financial analysis, is about organization and proper structure. There is a certain order to the steps in building an analysis that flows naturally and allows the reader of the analysis to quickly take in the information and make sense of all the numbers on the page. In this part of the book we will walk through the creation of a basic leveraged buyout transaction. By the end of this example explanation you should feel comfortable with all the key aspects of an LBO model and know how to construct one on your own.

The first step in building the analysis is preparing the sources and uses of funds for the leveraged buyout. After that, we will calculate and build out projections into the income statement. For our purposes, the best way to do this is by using some basic revenue growth and per-cent-of-margins assumptions.

After we have completed this work on the income statement we can focus our attention on the always important cash flows of the company as well as a debt sweep analysis, which breaks down the details regarding the paydown of debt that the company will be carrying on its balance sheet.

After we have finished analyzing the company’s cash flow and leverage, we can then calculate returns to shareholders, as well as something called the multiples of capital.

Once we have completed all of this we will look at what the effects will be, based on the scenario that we have projected, on shareholders’ equity as well as the company’s credit statistics.

Snapshot of the completed analysis