In this tutorial, you’ll learn how to determine the proper debt level to use in a leveraged buyout case study given by a private equity firm– all from using Google and free information you can find online.

Leveraged Buyout  Table of Contents:

2:35 Step 1: Find Comparable Deals and Estimate the Purchase Multiple and Debt / EBITDA

9:45 Step 2: Test Your Assumptions in Excel

16:21 Step 3: Tweak Your Assumptions as Necessary

18:21 Recap and Summary

Lesson Outline:

Question that came in the other day…

“Help! I just got a case study from a private equity firm I’m interviewing with.”

“I have to pick a consumer/retail company, download its filings, complete a leveraged buyout model for the company, and recommend for or against the deal.”

“How can I determine how much debt to use in the deal? They didn’t give me any instructions!”

You can figure this out simply in most cases without wasting a ton of time sifting through company’s filings. Here’s the 3-step process:

Step 1: Estimate the purchase multiple, purchase price, and Debt / EBITDA by looking at comparable buyout deals (NOT publicly traded companies, as they almost always have lower debt levels).

Step 2: Test your assumptions in Excel and see if the company can manage that much debt.

Step 3: Go back and tweak your assumptions as necessary.

The purchase price and Debt / EBITDA are very closely linked – for example, you can’t assume 6x Debt / EBITDA if you’re paying only 5x EV / EBITDA for the entire company.

For most public companies, you need to assume at least a 20-30% share price premium, and then make sure the implied EV / EBITDA multiple is in-line with those of other recent deals in the market.

Let’s say you pick Bed, Bath & Beyond [BBBY] for your LBO candidate.

To find 2-3 comparable LBO deals, you can do Google searches for terms like: