Leveraged Buyout (LBO) Calculator
Model PE acquisition returns with debt structures, EBITDA growth, and exit multiples
A Leveraged Buyout (LBO) is an acquisition of a company using significant amounts of borrowed money (leverage) to meet the cost of acquisition. Typically, the assets of the company being acquired are used as collateral for the loans, along with the assets of the acquiring company. The goal is to use the acquired company's cash flows to repay the debt while achieving strong equity returns through operational improvements and financial engineering.
Formula:
Equity Return (IRR) = ((Exit Value - Debt Repayment) / Initial Equity)^(1/Years) - 1Exit value is determined by EBITDA × Exit Multiple. Debt is repaid from cash flows over the holding period.
- 1
Enter the purchase price or enterprise value of the target company
- 2
Input the company's EBITDA and expected growth rate
- 3
Set the debt-to-equity ratio (typical LBOs use 60-70% debt)
- 4
Choose the interest rate on debt financing
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Set the expected holding period (typically 3-7 years)
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Input the entry and exit EBITDA multiples
- 7
View your projected IRR and cash-on-cash return
- Leverage amplifies equity returns - small improvements in operations can generate outsized returns
- Understanding LBO math is essential for private equity professionals
- The model helps evaluate whether a deal can meet fund return thresholds (typically 20%+ IRR)
- Debt paydown and multiple expansion are key value creation drivers
- Sensitivity analysis shows which assumptions drive returns most
- Evaluating potential acquisition targets
- Determining maximum purchase price for target returns
- Stress-testing deals under different scenarios
- Understanding value creation drivers
- Comparing different capital structures
- Preparing investment committee materials
- •Value creation typically comes 1/3 from EBITDA growth, 1/3 from debt paydown, 1/3 from multiple expansion
- •Interest coverage ratio (EBITDA/Interest) should stay above 2.0x
- •Model different exit scenarios - IPO, strategic sale, secondary buyout
- •Consider management equity incentive plans in your returns analysis
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Frequently Asked Questions
What is a Leveraged Buyout (LBO)?
An LBO is a financial transaction where a company is acquired using a significant amount of borrowed money (debt) to meet the acquisition cost. The assets of the company being acquired are often used as collateral for the loans. Private equity firms use LBOs to acquire companies with relatively little equity.
What is a typical equity contribution in an LBO?
Private equity firms typically contribute 30-40% equity in an LBO transaction, with the remaining 60-70% financed through debt. Higher-risk deals might require more equity (40-50%), while stable, cash-generative businesses can support higher leverage with less equity (20-30%).
How do private equity firms make money on LBOs?
PE firms generate returns through three main drivers: (1) EBITDA growth through operational improvements, (2) debt paydown using the company's cash flows, and (3) multiple expansion at exit. Target IRRs are typically 20-30% for successful LBO investments.
What is IRR in private equity?
Internal Rate of Return (IRR) is the annualized rate of return on an investment. In PE, a 20-25% IRR is considered good, while top-quartile funds achieve 25-30%+ IRR. IRR accounts for the timing and magnitude of all cash flows over the investment period.
What are typical LBO exit strategies?
Common exit strategies include: (1) Strategic sale to another company, (2) Secondary buyout to another PE firm, (3) Initial Public Offering (IPO), or (4) Recapitalization with dividend. The optimal strategy depends on market conditions and company performance.