LBO Quick Model

A leveraged buyout uses debt to fund an acquisition and cash flow to repay it. Set the entry price, leverage, growth and exit multiple to see the sponsor’s IRR and multiple of invested capital, and where the returns come from.

How it works

Model a leveraged buyout in minutes: entry valuation and debt, annual EBITDA growth and cash sweep, exit value, and the sponsor’s IRR and multiple of invested capital, with a value-creation bridge.

Entry EV = EBITDA × Entry multiple;  Debt = EBITDA × Leverage
Equity invested = EV + Fees − Debt
FCF = EBITDA − Interest − Taxes − Capex − Working capital investment (swept to debt)
Exit equity = Exit EBITDA × Exit multiple − Net debt
MOIC = Exit equity ÷ Equity invested;  IRR = MOIC^(1 / Years) − 1

Common uses

  • Screening private equity and acquisition opportunities
  • Testing how much leverage a business can support
  • Investment banking and private equity interview preparation

Worked example

The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.

Entry EBITDA$20,000,000
Entry EV / EBITDA9 ×
Debt / EBITDA at entry5 ×
Interest rate on debt9%
Transaction fees (% of EV)2%
EBITDA growth per year6%
Capex (% of EBITDA)20%
Working capital investment (% of EBITDA)5%
Tax rate25%
Holding period5 years
Exit EV / EBITDA9 ×
Example inputs
Sponsor IRR16.2%
Multiple of invested capital2.12×
Equity invested$83,600,000
Equity value at exit$176,907,633
Entry enterprise value$180,000,000
Exit enterprise value$240,880,604
Net debt at exit$63,972,971
Results

Free cash flow sweeps 100% to debt repayment; interest is charged on beginning-of-year debt. IRR assumes a single equity investment at entry and a single exit; dividends and recaps are excluded.

Interpreting the results

  • Private equity sponsors commonly target IRRs of roughly 20% or more and MOICs of 2.0× to 3.0× over five years.
  • Returns driven mostly by multiple expansion are the least reliable; underwrite to a flat or lower exit multiple.
  • Test leverage against interest coverage: EBITDA should comfortably exceed interest in every year.

Frequently asked questions

What returns do private equity firms target?

Sponsors commonly target internal rates of return of roughly 20% or more and multiples of invested capital of 2.0 to 3.0 times over a holding period of about five years, although targets vary by strategy and market conditions.

Where do LBO returns come from?

Returns come from three sources: EBITDA growth, changes in the valuation multiple between entry and exit, and debt paydown funded by the company’s cash flow. The value-creation bridge in this calculator separates each one.

Why is the exit multiple important?

The exit multiple applies to the entire business value, so small changes have a large effect on equity returns. Prudent models assume an exit multiple at or below the entry multiple rather than counting on expansion.

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