LBO
Factual definition
A leveraged buyout uses substantial debt to finance an acquisition. Returns depend on operating performance, cash available for debt repayment, financing terms and exit value; neither debt paydown nor a successful exit is guaranteed.
Also called Leveraged buyout
LBO in round numbers
Hypothetical, in US$ millions: entry annual earnings before interest, taxes, depreciation and amortization (EBITDA) of 100 at 8x gives enterprise value of 800, funded by debt of 500 and equity of 300. At an assumed exit exactly five years later, annual EBITDA is 130, enterprise value at 8x is 1,040 and debt is 200, leaving equity of 840. Assume zero cash and other enterprise-to-equity adjustments, no fees, interim distributions or additional equity. Gross equity multiple on invested capital (MOIC) is 840 ÷ 300 = 2.8x; terminal-only annual internal rate of return (IRR) is 2.8^(1/5) − 1 = 22.87%.
Scroll horizontally to read all columns.
| Measure | Entry: year 0 | Exit: year 5 |
|---|---|---|
| Annual EBITDA | 100 | 130 |
| Enterprise value at 8x | 800 | 1,040 |
| Debt | 500 | 200 |
| Equity; zero cash/other adjustments | 300 | 840 |
How Shayne Fitz-Coy uses LBO
This is from a pure play buyout case, the best, most perfect buyout case that has ever existed. I pray you see one deal like this in your lifetimes.
Terms Related to LBO
MOIC · Sources & Uses · Debt/EBITDA multiple · IRR · The Debt Lightsaber · The Death of Cheap Debt · Buy It, Make It Better, Sell It · The Walk/Watch/Worry Rule · All of the glossary