{"id":20785,"date":"2019-08-15T22:05:56","date_gmt":"2019-08-16T03:05:56","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=20785"},"modified":"2024-10-18T19:04:52","modified_gmt":"2024-10-19T00:04:52","slug":"lbo-returns-attribution-analysis","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/","title":{"rendered":"LBO &#8211; Returns Attribution Analysis (18:42)"},"content":{"rendered":"<p><div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">LBO - Returns Attribution Analysis<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/#How_Do_PE_Firms_Make_Money\" >How Do PE Firms Make Money?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/#Returns_Attribution_Analysis_Formulas\" >Returns Attribution Analysis Formulas<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/#Setting_Up_a_Simple_LBO_Model\" >Setting Up a Simple LBO Model<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/#IRR_and_MoM_Multiples\" >IRR and MoM Multiples<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-returns-attribution-analysis\/#CONCLUSIONS_HERE\" >CONCLUSIONS HERE:<\/a><\/li><\/ul><\/nav><\/div>\n<br \/>\nYou\u2019ll also see how EBITDA growth, multiple expansion, and debt pay-down and cash generation all play a role \u2013 and what drivers make a deal look favorable or less favorable.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Do_PE_Firms_Make_Money\"><\/span>How Do PE Firms Make Money?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To make money in a leveraged buyout, one or more of the following must happen:<\/p>\n<ol>\n<li>The company&#8217;s EBITDA must grow.<\/li>\n<li>There must be multiple expansion (exit EBITDA multiple is higher than the purchase EBITDA multiple).<\/li>\n<li>A significant amount of debt must be used and repaid and\/or a significant amount of cash must be generated in the same period.<\/li>\n<\/ol>\n<p>So yes, you CAN buy a company at one multiple and sell it at the same multiple and still earn a 20% IRR&#8230; if you have enough of the two other factors.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Returns_Attribution_Analysis_Formulas\"><\/span>Returns Attribution Analysis Formulas<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3>EBITDA Growth:<\/h3>\n<p>(Final Year EBITDA \u2013 Initial EBITDA) * EBITDA Purchase Multiple<\/p>\n<p><strong>Intuition:<\/strong> How much more do you get for your money?<\/p>\n<h3>Multiple Expansion:<\/h3>\n<p>(Exit Multiple \u2013 Purchase Multiple) * Final Year EBITDA<\/p>\n<p><strong>Intuition:<\/strong> How much more value does the final EBITDA contribute?<\/p>\n<h3>Debt Paydown and Cash Generation:<\/h3>\n<p>Back into this by subtracting the other two above from the total returns to equity investors in the LBO.<\/p>\n<p><strong>Intuition:<\/strong> \u201cEverything else!\u201d<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Setting_Up_a_Simple_LBO_Model\"><\/span>Setting Up a Simple LBO Model<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To test this yourself, look at the template above and fill out the assumptions for revenue, EBITDA, Pre-Tax Income, and Net Income, and then the Cash Flow Statement line items.<\/p>\n<p>Debt repaid each year is equal to MIN(Free Cash Flow, Previous Year&#8217;s Ending Balance).<\/p>\n<p>Then, debt decreases by the amount that&#8217;s repaid; cash increases by any FCF that&#8217;s left over and was NOT used for debt repayment.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"IRR_and_MoM_Multiples\"><\/span>IRR and MoM Multiples<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Calculate the Exit Enterprise Value with Final Year EBITDA * Assumed EBITDA Exit Multiple, and subtract debt and add cash to get the Proceeds to Equity Investors.<\/p>\n<p>IRR = (Exit Proceeds to Equity Investors \/ Initial Equity Contribution) ^ (1 \/ # Years in Model) &#8211; 1<\/p>\n<p>MoM Multiple = (Exit Proceeds to Equity Investors \/ Initial Equity Contribution)<\/p>\n<h3>Returns Attribution<\/h3>\n<p>Calculate this using the formulas above.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"CONCLUSIONS_HERE\"><\/span>CONCLUSIONS HERE:<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Ideally, we would prefer nothing from multiple expansion as it&#8217;s unreliable and hard to predict or take advantage of.<\/p>\n<p>We would also like to see more from debt paydown, because the company could afford to take on more debt in the model.<\/p>\n<p>If the company&#8217;s growth rate were slower or its margins were lower, we might *have* to use additional debt to make the model work.<\/p>\n<p>So back to that question in the beginning: yes, a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/dividend-recap\/\" target=\"_blank\" rel=\"noopener\">dividend recap<\/a> is one way to make a deal work if there&#8217;s no multiple expansion&#8230; but it&#8217;s not the only way.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn about what drives the IRR or money-on-money multiple in a leveraged buyout.<\/p>\n","protected":false},"featured_media":29351,"template":"","class_list":["post-20785","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-leveraged-buyouts-and-lbo-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/20785","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29351"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=20785"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}