Blog Home > Modern Finance > The Leveraged Buyout (LBO) Model: Everything You Need To Know

The Leveraged Buyout (LBO) Model: Everything You Need To Know

Table of Contents

Leveraged buyouts (LBOs) are strategic acquisition deals that have high return potential but also come with substantial risk, as they’re funded through a significant amount of debt.  

Thorough planning and accurate projections are essential to the success of a leveraged buyout, and companies can use a leveraged buyout model (typically built in Excel) to assess whether the transaction is worthwhile. 

A leveraged buyout model includes a combination of risk assessment, future projections, and standard financial metrics of the target company. In this blog, we’ll cover the key components of the LBO model in more detail, then walk through actionable steps you can take to build one yourself. 

💡Key Takeaways 

  • A leveraged buyout model enables companies to make financial projections and assess risk around LBO deals.
  • Key components of an LBO model include financial statements, assumptions and projections, acquisition structure, financial metrics, sensitivity analysis and exit strategy.
  • Manual financial planning and reporting processes can hinder companies' ability to identify acquisition opportunities.

What Is a Leveraged Buyout? 

A leveraged buyout is the acquisition of a company using borrowed funds. They’re typically done by private equity (PE) firms that borrow a large portion of the total cost of acquisition from a variety of lenders, putting as little of their own money down as they can. 

The assets of the company being acquired and the acquiring company are then used as collateral on the loan. 

Leveraged buyouts are popular with PE firms because using debt (leverage) to finance acquisition deals can increase both return on equity (ROE) and internal rate of return (IRR), enabling companies to maximize profit back from their investments. 

Because the cost of debt is typically lower than the expected return on those assets, firms can reliably earn higher profits and better overall returns. 

Common reasons why a company or private equity firm would want to pursue leveraged buyout include to take a public company private, to acquire a competitor and/or to restructure a company and quickly resell it. 

What Is a Leveraged Buyout Model? 

A leveraged buyout model is an Excel-based financial model used to evaluate potential LBO deals. The goal of an LBO model is to help private equity or investment banking analysts assess risk and return potential to make smart decisions about which companies to target for acquisition. 

LBO models typically consist of a few key components: 

Financial Statements for the Target Company 

This includes historical income statements, balance sheets, and cash flow statements. These statements provide a basis for understanding the company's past performance and projecting its future financials. 

Assumptions and Projections 

Assumptions and projections should be defined around the target company’s expected future performance. These assumptions can include revenue growth rates, expense levels and capital expenditures. The LBO model then calculates the resulting cash flows, taking into account any debt repayments and interest expenses. 

Acquisition Structure 

Acquisition structure includes the purchase price, the amount of debt to be raised, and the equity contribution from the acquiring company or investor group. The LBO model calculates the required internal rate of return (IRR) for the investors based on the risk profile of the transaction and the capital structure. 

Key Financial Metrics 

In addition to IRR, the LBO model can be used to calculate various financial metrics that help in assessing the attractiveness of the deal. These metrics include cash-on-cash multiple (the total cash earned on the total cash invested) and debt service coverage ratio (how much cash flow is available to pay debt obligations). These metrics help determine whether the transaction is financially viable and whether the expected returns meet the investors' requirements. 

Sensitivity Analysis 

LBO models typically include some form of scenario planning to assess how the target company’s financial performance may be impacted by both internal and external factors in the future. Analysts also often use sensitivity analysis to assess how specific variables or assumptions may impact the outcome of an LBO.  

This step helps identify the key drivers of the transaction's success and the potential risks associated with the investment. 

Exit Strategy 

The LBO model also considers the eventual exit strategy for the acquiring company, which could involve selling the acquired company through an initial public offering (IPO), a sale to another buyer, or a recapitalization. The model can estimate the potential proceeds from the exit and calculate the potential return on investment from each. 

5 Steps To Building a Leveraged Buyout Model 

For companies considering pursuit of a leveraged buyout, it’s critical to know what you’ll need to prepare as you carry out that exploration through building a leveraged buyout model. These steps include: 

1. Have a Process for Targeting Companies 

Your leveraged buyout model may be built around a particular profile describing the types of companies you target for LBO transactions. Define your ideal target company in detail so you know what you’re looking for when analyzing your LBO model. 

2. Determine Your Capital Structure 

Next, you’ll need to determine the purchase price of the target company (as determined by a company valuation) as well as the capital structure of the transaction, which outlines the exact ratio of debt and equity that will be used to fund the purchase. During this step, you’ll also need to determine the types of debt you’ll use (i.e. bank debt, high-yield debt, etc.). 

3. Assess Risk 

Scenario planning is the next essential step to building your LBO model and the primary way you’ll assess the risk involved with your LBO transaction. 

Scenario planning looks at a variety of potential future scenarios using predictive analytics so you can evaluate how different potential outcomes or economic factors can impact the success of your deal. 

4. Build Financial Projections and Plan Cash Flows 

Once you’ve fully outlined the structure of your deal based on return potential and risk analysis, it’s time to build your financial projections around your target company’s future financial statements. Then, project future cash flows and determine cash available for debt repayment. Finally, determine your planned repayment timeline and structure based on financial projections. 

5. Plan Your Exit Strategy 

Based on the structure of your deal, projected returns and potential risk factors, your LBO model should be able to determine the best potential exit strategy for selling the target company. Planning your exit strategy at the start of your LBO deal allows you to work toward a specific goal and tailor your strategies accordingly over the lifetime of your deal. 

Agile Financial Processes Makes Acquisition Planning Easier 

Leveraged buyout deals undoubtedly come with risk and require appropriate resources, experience and strategic expertise during the decision process. Knowing how to produce a reliable LBO model enhances your ability to assess risk, predict future ROI and successfully navigate uncertainty by planning for multiple potential outcomes. 

Another key consideration when it comes to identifying acquisition opportunities is whether your budgeting and planning processes are making things easier or harder. 

If manual processes make it difficult for you to report on your company's financial performance and available capital, your ability to proactively identify acquisition opportunities is significantly reduced.  

Mani Alkhafaji, VP of Business Planning and Procurement for First Majestic Silver Corp., put it aptly when explaining how the Vena platform enhanced their ability to identify investment opportunities. He said: 

“We’re a very dynamic company. We’re always looking at acquisition opportunities and adding new sites to our portfolio. But if your processes are all manual, it’s harder to see the big picture and quickly map out how those investments might work for the business.” 

To stay on the pulse of future opportunities and make smart financial decisions, you need automated financial planning software to give you time back to focus on that all-important analysis.


vena-blog_The Complete Guide to Consolidated Financial Statements
The Complete Guide to Consolidated Financial Statements

Learn how to improve your financial consolidation process to get a 360-degree view of your multi-entity organization's financial health.

Read the Blog


Illustration of an opened envelope with a lightbulb

Like this content?

Get resources curated just for you and your department.

Learn More

About the Author

Tom Seegmiller, Vice President, FP&A, Vena

As Vice President, FP&A at Vena, Tom Seegmiller is responsible for strategic finance, including business partnering, budgeting and forecasting, with a focus on optimizing enterprise value. Tom is instrumental in the formulation of the financial narrative for the executive leadership team, investors and board members. Tom has always had a focus on driving enhanced business decisions through leveraging financial and operational data. He is an experienced finance executive, having most recently led the finance team at Miovision Technologies. Prior to that, he was in senior FP&A leadership roles at OpenText. Tom enjoys golfing, skiing, exercising and traveling in his spare time, but most importantly, he loves spending time with his wife and daughter.

Read More