If the investor has decided to go deeper into the transaction process after reviewing and checking the documents, the seller will soon expect a preliminary offer. Various methods (initially simplified) can be used for an initial indication.
In addition to valuation using transaction multiples, the so-called leveraged buy-out model has become established in recent decades, particularly among financial investors, due to the strong focus on returns. But what exactly is behind it?
The term leveraged buyout refers to a specific form of company takeover that is predominantly financed by borrowed capital. The procurement of this debt capital is then generally secured by the company's assets and simultaneously subject to interest and repayment charges. Repayment is then made through the cash flow generated.
The leveraged buyout thus owes its name to the fact that in this technique of acquiring a company, the debt financing portion acts as a lever to increase the profitability of the equity capital employed. The investor can thus achieve a high return on equity with a low equity contribution, provided that the total return on capital exceeds the interest on debt. An LBO model is often used when the buyer intends to resell the company after a certain period of time.
These Excel valuation models often require a high level of detail, are prone to errors and can often only be used by specialists.
How such an LBO model can look in a simplified form and at the beginning with an incomplete database is explained below. With our Best Practice LBO Tool, we want to provide you with a small tool with which you can make a rough assessment of the return potential of a deal in just a few minutes. Below you will find an Excel template that can be modified as required in the respective input fields and instructions that will guide you through the individual steps of the valuation based on this template.
Our Best Practice Guide shows you the best approach step by step:
- Basic assumption selling price
- Source of funds & use
- Financial forecasts
- Balance sheet adjustments
- Basic assumptions & exit
- Calculation IRR
Read the DealCircle BestPractice LBO Model Guide here and also receive our Excel template.
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