LBO Modeling Case Study – INNOSPEC INC.

Learn the concept of LBO (Leveraged Buy-out) from scratch and also learn how to prepare LBO Modeling through practical example.

Overview of the LBO Modeling

An LBO model of leveraged buyout shows what all takes place when a company is acquired by a private equity firm by using a combination of equity or cash along with debt which is then sold off within a period of 3-5 years. By taking such a step, the aim of the private equity firm is to earn a return of 20 -25 percent which is far in excess of the “historical average annual return” in case of the stock markets. The leveraged buyouts are more or less same to the normal deals of merger and acquisitions; the only difference is that in a leveraged buyout, the assumption is that the buyer will be selling the target in future.

The working of the Concept of Leveraged BuyOut (LBO MOdel)

There exists a similarity between purchasing a house and leveraged buyout as a combination of down payment as well as a mortgage can be made use of. In the case of both these transactions, there is saving of money as a small amount is put down in cash and the remaining is borrowed. In case of the leveraged buyout, the “down payment” is known as the equity or the cash whereas the “mortgage” is known as the debt. The debt is utilised by the private equity firms for boosting its returns. If everything else is equivalent, it means that if the private equity firm makes use of more leverage or debt, the firm is likely to earn a higher rate of return on the investment that has been made by it.

As far as the real LBO model is concerned, the repayment of debt is made by the companies over a period of time which boosts the returns of the private equity firm even more. The numbers show a significant improvement with leverage due to the following reasons –

• What money is worth today is higher than what it will be worth in future- This means that earning higher amount of money 5 years from now will be great, however, it is much better t=if that same amount of money is saved today because of money’s time value.
• Earning a higher amount of return on a money of a smaller amount is much more easy– It is difficult for the portfolio managers with thousands of crores under management to earn rates of return that are high, however for individual investors who have for example made investments of less than one crore, it is much easier to earn returns that are higher. This is the reason why leverage is used by the private equity firms. It goes on to boost their returns in a significant way by bringing reductions in the upfront investment.

Building a LBO Model

LBO Modeling is a process that can be divided into 8 steps. These steps consist of –

• Determination of the price of purchase as well as the amount of equity and debt which will be required
• The debt tranches are assigned with the repayment percentages, interest rates and percentage totals
• A table of “Sources and Uses” is created for tracking the ways the funds will be used in the deal
• The income statement projections are built on the basis of the assumptions for revenue as well as for expenses
• Calculation of the “Free Cash Flow” is done along with the cash that is available for the repayment of debt
• The debt schedule is completed and the mandatory as well as the optional repayments are determined
• The debt schedule is then linked to the cash flow statement and also to the income statement
• The investor returns are then calculated and the sensitivity tables are created

Ideal Candidates for the Leveraged BuyOut

The “ideal” candidate for the LBO Model should –

• Have cash flows that are stable as well as predictable for repayment of debt
• Be undervalued with respect to the industry peers (lower price of purchase)
• Be a business that is associated with low risks (repayment of debts)
• The need for ongoing investments like CapEx should not be much
• Have the capability of cutting costs and increasing margins
• Have a management team that is strong
• Have a solid asset base for using as collateral for debt

Of all the points the first one is of utmost significance as nobody will lend to a company as well as finance an LBO model if the cash flow of the company is unpredictable.

LBO Modeling Course Description

The course of the LBO Modeling is divided into various sections as well as subsections in the following way –

LBO Analysis of the American Eagle Outfitters

• Overview
• Assumptions for the transaction
• Debt Assumptions
• Sources as well as uses
• Populating of the historical values

Build-up of Revenue

• Revenue Build-up

Cost Sheet

• Calculations of the cost sheet

Management of Working Capital

• Management of working capital
• Management of working capital
• Ratios as well as Assumptions

Depreciation and Amortization

• Capex – Base Equation
• Depreciation Schedule
• Calculation of Depreciation
• Schedule of Amortization

Linkages to Financial Statements

• Linkage of the income statement
• Linkage of the balance sheet
• Linkage of the cash flow statement

Equity Schedule of the Shareholders

• Equity Schedule of the Shareholders

Schedule of Debt

• Schedule of Debt
• Completion of the Missing Links

IRR and Sensitivity Analysis

• Calculation of IRR
• Sensitivity Analysis

What are the requirements/pre-requisites?

The main requirements for the LBO Modeling course consist of the following –

• A computer that has an internet connection
• Basic introductory knowledge of working in excel
• Basic introductory knowledge related to accounting
• A general exposure to corporate finance will be of help although it is not essential to have such an exposure

Target Audience for this LBO Model Training

The target audience for the training of LBO Modeling includes the following –

• Novice students who have interest in pursuing a career in the financial sector
• Working Professionals
• Any other person who may have interest in undertaking the LBO Modeling course

LBO Model FAQs – General Questions

1. I am new to this course of LBO Modeling. Will I face difficulties in learning about its various concepts?

No, you will not be facing any difficulties in learning about the various concepts even though you are new to LBO Modeling. The reason for this is that the course has been explained right from the beginning which does not require you to have any prior knowledge related to the subject. All the concepts will be well explained through videos as well as practical files by our team of experts. Relevant examples have also been provided for making the learning more practical.

2. What are the various things that I will be learning from this course?

The various things that you will be learning as a part of this course consist of the topics related to build-up revenue and cost sheet, It will also be discussing about the working capital management, depreciation along with amortization, linkages to the financial statements, the shareholders’ equity schedule, schedule of debt and also analysis of sensitivity and IRR. The LBO analysis of “American Eagle Outfitters” will also be discussed as a part of this course.

3. What are the career options that will be available to me after pursuing this course?

There are a number of career options in the financial sector that will be available to you after pursuing this LBO modeling course. LBO Modeling is used widely in the private equity firms and also in the investment banks. A lot of questions are also asked in the various financial interviews on LBO Modeling and its applications.

LBO Modeling Course Testimonials

Jonathan Hall

The course of LBO Modeling was very detailed and an in depth analysis was provided. It had processes and pathways with high degree of clarity for all calculations in excel formulas and spreadsheets. Thorough analysis along with the sweeping descriptions of all the modeling aspects provided for one of the sessions of this bundle that was more applicable and informative. The instructions that were provided for modeling outline that was classically complicated were in a step by step manner and were easy to follow due to very high clarity.

Peter Stephens

I really like this website as it provides a lot of knowledge about a number of interesting topics. LBO Modeling that is offered by the eduCBA website provides the participants with a lot of useful information. It is a great course with very useful and good methods of teaching. I was initially apprehensive about pursuing this course but once I completed it, I found it to be very handy. When I got myself enrolled and undertook the video sessions related to this course, I figured out that the faculty was very good and the teaching methods that were used by them were very simple that made understanding the course extremely easy. This assisted me in getting all my doubts related to the course cleared and I easily completed the LBO model course. I will highly recommend this course to anyone having interest in LBO Modelling.

Manish Verma

Firstly, I would like to thank eduCBA for providing me with such a wonderful platform for learning about LBO Modeling. This was the first online LBO modeling course that I undertook and I was highly satisfied with the experience. The quality of the videos was exceptional and I was very impressed with the knowledge that the faculty possessed. Being an online course that I could pursue at my own convenience saved a lot of my time and increased my proficiency and efficiency. I will suggest that everyone who wants to learn about LBO Modeling should join this course. This will definitely help you in making a good impact in your career and bring in a number of opportunities for further growth. I am thankful to the eduCBA group for offering this course to us.

Career Benefits of this LBO Model Training

Cost Effective and Highly Practical

The course of Leveraged Buyout LBO Modeling that is offered by the website of eduCBA is very cost effective. the investments you make in learning is this LBO modeling course is very small in comparison to the benefits that you will be deriving after finishing this course in the form of a number of career options that are available. Thus, it is highly practical and is used on a large scale in the private equity firms as well as the investment banks and frequently it forms a part of the questions that are asked in a financial interview.

Detailed and in-depth analysis

This course on LBO Modeling that is offered by eduCBA is very detailed and consists of an in-depth analysis. It will start right from the scratch and will explain to you about the way you can build a real as well as complex model of LBO. You will also be learning about the basic concepts of LBO Model, typical structures of the deal along with the current dynamics in the industry. It will be discussing the LBO Analysis of the “American Eagle Outfitters”, a build-up of revenue, cost sheet, management of working capital, depreciation as well as amortization, how to form links with the financial statements, equity schedule of the shareholders, schedule of debt and IRR along with the sensitivity analysis.

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