LBO Model Interview Questions: What to Expect
In this tutorial, you'll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts.
Table of Contents:
2:36 Question #1: LBO Model Walkthrough
5:34 Question #2: Ideal LBO Candidates
8:09 Question #3: How to Approximate IRR
11:46 Question #4: How to Solve for EBITDA or the Purchase Price
13:58 Question #5: How to Approximate the IRR in an IPO Exit
16:03 Recap, Summary, and Key Principles
Lesson Outline:
Will you get LBO-related questions in interviews?
Yes, possibly, but full case studies are unlikely unless you're interviewing for PE roles or more advanced IB roles.
Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they're more likely to give you *simple* cases and numerical tests rather than complex ones.
A typical progression for LBO models might be as follows:
Question #1: LBO Model Walkthrough
"In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront."
In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins.
In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm.
In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill.
In Step 4, you project the company's statements, or at least its cash flow, and determine how much Debt it repays each year.
Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR.
Question #2: Ideal LBO Candidates
Price is the most important factor because almost any deal can work at the right price – but if the price is too high, the chances of failure increase substantially.
Beyond that, stable and predictable cash flows are important, there shouldn't be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion.
Question #3: Approximating IRR
"A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt.
The company's EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What's the IRR?"
Initial Investor Equity = $100 million * 10 * 40% = $400 million
Exit Enterprise Value = $150 million * 9 = $1,350 million
Debt Remaining Upon Exit = $600 million – $250 million = $350 million
Exit Equity Proceeds = $1,350 million – $350 million = $1 billion
IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it's ~20%.
Question #4: Back-Solving for Assumptions
"You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA.
You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?"
Initial Investor Equity = $100 * 10 * 50% = $500
20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%)
Exit Equity Proceeds = $500 * 2.5 = $1,250
Remaining Debt = $250, so Exit Enterprise Value = $1,500
Required EBITDA = $150, since $1,500 / 10 = $150
Question #5: Approximating IRR in an IPO Exit
"A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt.
The company's EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What's the IRR?"
Initial Investor Equity = $200 * 8 * 50% = $800
Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400
"Average Year" to Exit = 1/3 * 3 + 1/3 * 4 + 1/3 * 5 = 4 years
IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25%
Approximate IRR: ~35% (This one's a bit off – see Excel.)
RESOURCES:
https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-13-LBO-Model-Interview-Questions-Slides.pdf
Видео LBO Model Interview Questions: What to Expect канала Mergers & Inquisitions / Breaking Into Wall Street
Table of Contents:
2:36 Question #1: LBO Model Walkthrough
5:34 Question #2: Ideal LBO Candidates
8:09 Question #3: How to Approximate IRR
11:46 Question #4: How to Solve for EBITDA or the Purchase Price
13:58 Question #5: How to Approximate the IRR in an IPO Exit
16:03 Recap, Summary, and Key Principles
Lesson Outline:
Will you get LBO-related questions in interviews?
Yes, possibly, but full case studies are unlikely unless you're interviewing for PE roles or more advanced IB roles.
Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they're more likely to give you *simple* cases and numerical tests rather than complex ones.
A typical progression for LBO models might be as follows:
Question #1: LBO Model Walkthrough
"In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront."
In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins.
In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm.
In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill.
In Step 4, you project the company's statements, or at least its cash flow, and determine how much Debt it repays each year.
Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR.
Question #2: Ideal LBO Candidates
Price is the most important factor because almost any deal can work at the right price – but if the price is too high, the chances of failure increase substantially.
Beyond that, stable and predictable cash flows are important, there shouldn't be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion.
Question #3: Approximating IRR
"A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt.
The company's EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What's the IRR?"
Initial Investor Equity = $100 million * 10 * 40% = $400 million
Exit Enterprise Value = $150 million * 9 = $1,350 million
Debt Remaining Upon Exit = $600 million – $250 million = $350 million
Exit Equity Proceeds = $1,350 million – $350 million = $1 billion
IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it's ~20%.
Question #4: Back-Solving for Assumptions
"You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA.
You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?"
Initial Investor Equity = $100 * 10 * 50% = $500
20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%)
Exit Equity Proceeds = $500 * 2.5 = $1,250
Remaining Debt = $250, so Exit Enterprise Value = $1,500
Required EBITDA = $150, since $1,500 / 10 = $150
Question #5: Approximating IRR in an IPO Exit
"A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt.
The company's EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What's the IRR?"
Initial Investor Equity = $200 * 8 * 50% = $800
Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400
"Average Year" to Exit = 1/3 * 3 + 1/3 * 4 + 1/3 * 5 = 4 years
IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25%
Approximate IRR: ~35% (This one's a bit off – see Excel.)
RESOURCES:
https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-13-LBO-Model-Interview-Questions-Slides.pdf
Видео LBO Model Interview Questions: What to Expect канала Mergers & Inquisitions / Breaking Into Wall Street
Показать
Комментарии отсутствуют
Информация о видео
2 ноября 2016 г. 2:34:52
00:18:49
Другие видео канала
Simple LBO Model - Case Study and TutorialInvestment Banking Technical Interview QuestionsBloomberg Private Equity Guide InterviewFree Cash Flow vs. Unlevered Free Cash Flow vs. Levered Free Cash FlowValuation in Four Lessons | Aswath Damodaran | Talks at GoogleLBO Exit Strategies: M&A, IPOs, and Dividends / RecapitalizationsThe Great SPAC Scam: Why SPACs Are Terrible for Most InvestorsCASE INTERVIEW WITH FORMER MCKINSEY INTERVIEWER: FLASHFASHPrivate Company ValuationInterview Answer - What Is A Leverage Buy Out (LBO)Merger Model Interview Questions: What to ExpectLBO Model: Sources & UsesInvestment Banking Analyst Interview (2021) Questions and AnswersEBIT vs. EBITDA vs. Net Income: How They Differ, and How New Accounting Rules Affect ThemHow to work a Leveraged Buy Out or LBO - How to Buy a Business - David C BarnettWACC, Cost of Equity, and Cost of Debt in a DCFAccretion Dilution - Rules of Thumb for Merger ModelsLBO Model Case Study: Assessment CenterFramework for a McKinsey, Bain, BCG Acquisition Case