Lbo Floor Valuation

The lbo or leveraged buyout valuation model estimates the current value of a business to a financial buyer based on the business s forecast financial performance.

Lbo floor valuation.

Capital structure of an lbo leveraged buyout lbo overview value creation in an lbo in a leveraged buyout lbo the target company s existing debt is usually refinanced although it can be rolled over and replaced with new debt to finance the transaction. The most common example is taking out a mortgage when you buy a house. Give an example of a real life lbo. Valuation or dcf model the purpose of a valuation model is to determine the valuation of an enterprise.

An excellent means to establish a floor valuation i e an lbo analysis will determine the amount that a financial buyer sponsor would be willing to pay for the company thereby determining the value that a strategic bidder will have to exceed. An already completed five year financial forecast and two assumptions are all that is necessary to create a first draft of a comprehensive lbo valuation of the business. Investor equity in an lbo mortgage. The lbo analysis generally provides a floor valuation for the company and is useful in determining what a financial sponsor can afford to pay for the target and still realize an adequate return on its investment.

The lbo valuation model analyzes the value of your business from the point of view of a financial buyer who owns no other businesses in your industry and therefore expects all of its investment return to result solely from the future operations of the business. Here s the easiest way to think about it. With an lbo you do not get any value from the cash flows of a company in between year 1 and the final year you re only valuing it based on its terminal value. Various types of financial models exist including discounted cash flow dcf valuation models leveraged buyout lbo models credit models and a merger and acquisition m a models with each type of model serving its own purpose.

This is sometimes called a floor valuation because pe firms almost always pay less for a company than strategic acquirers would. Here s how the analogy works. Leverage buyout lbo analysis pro.