{"id":21244,"date":"2019-11-26T23:59:07","date_gmt":"2019-11-27T04:59:07","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21244"},"modified":"2024-09-02T18:05:29","modified_gmt":"2024-09-02T23:05:29","slug":"lbo-valuation","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-valuation\/","title":{"rendered":"LBO Valuation (19:36)"},"content":{"rendered":"<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 Valuation<\/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-valuation\/#Requirements_to_Use_an_LBO_Model_for_Valuation_Purposes\">Requirements to Use an LBO Model for Valuation Purposes<\/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-valuation\/#Using_Goal_Seek_to_Value_a_Company_in_an_LBO\">Using Goal Seek to Value a Company in an LBO<\/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-valuation\/#Setting_Up_Sensitivity_Tables\">Setting Up Sensitivity Tables<\/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-valuation\/#Answering_the_Other_Case_Study_Questions\">Answering the Other Case Study Questions<\/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-valuation\/#Recap_and_Summary\">Recap and Summary<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<p>Download the documents linked to under this video to see the case study instructions and understand this lesson (and the follow-up lesson after this one).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Requirements_to_Use_an_LBO_Model_for_Valuation_Purposes\"><\/span>Requirements to Use an LBO Model for Valuation Purposes<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>First, you need to reduce the purchase assumption and exit assumptions to single cells, ideally an EBITDA multiple for both, or perhaps a premium to the current share price for the purchase assumption.<\/p>\n<p>Second, you must DISABLE circular references and use the beginning debt and cash balances to calculate interest (see our tutorial on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/excel\/circular-reference-excel\/\" target=\"_blank\" rel=\"noopener\">how to remove circular references in Excel<\/a>).<\/p>\n<p>Otherwise, Goal Seek will not work properly.<\/p>\n<p>Finally, your IRR and CoC multiple cells should stay in the same position regardless of the exit year. This just makes it easier to set up sensitivities and to use Goal Seek.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Using_Goal_Seek_to_Value_a_Company_in_an_LBO\"><\/span>Using Goal Seek to Value a Company in an LBO<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You can use Goal Seek (Alt + A + W + G) to determine how much a private equity firm could pay for a company, if it exits at a specific multiple and is targeting a specific IRR or cash-on-cash multiple.<\/p>\n<p>You can also use it to check for multiple conditions, such as what EBITDA margin would be necessary if the targeted multiple is X and the purchase price is Y.<\/p>\n<p>In Excel, select the CoC multiple or IRR cell, press Alt + A + W + G, set it to the value you want, and then select the EBITDA purchase multiple cell for the one you\u2019re changing.<\/p>\n<p>You will then get a solution that indicates the multiple the PE firm could pay to achieve the returns they are targeting.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Setting_Up_Sensitivity_Tables\"><\/span>Setting Up Sensitivity Tables<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You can also set up sensitivity tables to look at these values over broader ranges. We recommend going up and down by around 20-30% over the baseline purchase and exit multiples.<\/p>\n<p>You MUST hard-code the rows and columns of the sensitivity tables and you CANNOT link them to actual parts of the LBO model.<\/p>\n<p>Link to the figure you want to calculate in the top-left corner of the table, and then highlight the whole table and press Alt + D + T or Alt + A + W + T to calculate the entire range of values.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Answering_the_Other_Case_Study_Questions\"><\/span>Answering the Other Case Study Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>With all of this set up, the rest of the case study questions are straightforward to answer: just use Goal Seek to determine the appropriate purchase\/exit multiples, EBITDA margins, or revenue growth rates.<\/p>\n<h3>Modeling an IPO Exit<\/h3>\n<p>You can use the same analysis for an IPO exit as well, and if you wanted you could even tie it together with the LBO valuation by determining the amount a private equity firm could pay if they take the company public at a certain valuation in the future.<\/p>\n<p>In an IPO exit, you assume that only part of the firm\u2019s stake is sold initially, and that the rest is sold over time. The share price may also fluctuate, so the firm may end up with a stake that is worth more or less in future years<\/p>\n<p>Finally, the instructions here state that senior debt should be maintained in the IPO exit, so we assume that only the Second Lien and PIK Loan are repaid.<\/p>\n<p>The actual assumptions in real life vary, but often at least some debt is maintained even after the company goes public.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Recap_and_Summary\"><\/span>Recap and Summary<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The key points with this case study are:<\/p>\n<ol>\n<li>Set up the assumptions properly, simplify, and reduce everything down to a few key inputs to save time.<\/li>\n<li>Avoid a complex <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/debt-schedule\/\" target=\"_blank\" rel=\"noopener\">debt schedule<\/a> since there are no optional repayments anyway.<\/li>\n<li>Make sure the investor returns calculations section is flexible enough to work with both an M&amp;A and an IPO exit, and that it supports Goal Seek.<\/li>\n<li>For Goal Seek and the case study questions, avoid circular references, simplify the purchase and exit assumptions down to 2 cells, and make sure the IRR and CoC multiple cells stay in the same place.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"<p>In this follow-up LBO Valuation tutorial, you\u2019ll learn how to use an LBO model for valuation purposes, and how to tweak the model so that you can use built-in Excel functions such as Goal Seek to value companies.<\/p>\n","protected":false},"featured_media":21915,"template":"","class_list":["post-21244","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\/21244","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\/21915"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21244"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}