Paper LBO - Step-by-Step Example Multiple Expansion

Paper LBO - Step-by-Step Example 2020-07-24 Introduction The dreaded paper LBO is a common obstacle during the private equity recruiting process. Paper LBOs can be intimidating, in part, because they're not something you do as a banker or a consultant. Maybe you make real LBOs, which are good preparation for private equity modeling tests, but paper LBOs are a different beast. The What First, what is a paper LBO ? A paper LBO is a simplified LBO that can be completed with pen and paper quickly (ten minutes tops). The Why Why does anyone bother with paper LBOs ? What's the point ? Paper LBOs are used during private equity interviews to test
the following: 1 . That you understand LBO mechanics well enough to perform the calculations with pen and paper - not using a well-trodden Excel template that has been passed down through generations of banking analysts 2 . That you can do simple math quickly while under pressure - PE folks seem to think this is important ¯\ ( ) Paper LBOs demonstrate that candidates can do private equity math on the spot, without Excel . Think back to the good ol' days. Today's titans of private equity didn't even have Excel when they got started. They did some basic spreadsheet math, sure , but it wasn't the complex analysis that you see today. The upper levels of private equity require suave professionals, who can do basic analysis in their head (or using an iPhone calculator) while golfing several beers deep. That's a caricature, but you get the point. So now we know what paper LBOs are and why folks bother. Let's do one together. Paper LBO Calculate the sponsor's IRR and Multiple of Invested Capital (MoIC) using the information provided below:
Transaction Assumptions 9.0x transaction multiple Cash-free, debt-free transaction 3.0x senior secured debt (4% interest rate, repayable immediately) 3.0x junior debt (8% interest rate, no early repayment) No transaction expenses LTM Financials 100mm Revenue 15mm EBITDA Projections 5% sales growth Y1 - Y3, followed by 3% sales growth Constant EBITDA margin 4mm CapEx Y1 - Y3, then 3mm CapEx per year 3mm depreciation & amortization (D&A) each year 2mm increase in net working capital (NWC) each year 30% tax rate Exit Assumptions Exit after 5 years at 9.5x LTM EBITDA Cash-free, debt-free transaction No transaction expenses
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