Build an LBO Model
This guide shows you how to build a leveraged buyout (LBO) model in Model Reef using the existing operational forecast, debt variables, the Cash Waterfall and FCFF or FCFE based valuation.
Model Reef does not use spreadsheet style layouts. The LBO is created by combining variables, timing rules and valuation settings inside a single model.
Before you start
You should already have:
A working three statement model for the target business.
Revenue, COGS, opex, staff, tax, capex and any existing debt modelled.
A Cash Waterfall that reconciles to the Cashflow Statement.
A basic FCFF or FCFE valuation set up.
If not, start with:
Build a Full Financial Model from Scratch
Build a Cash Waterfall Model
Build a DCF Model (FCFF)
What you will build
By the end you will have:
An LBO specific model representing the post acquisition capital structure.
Acquisition variables for purchase price, equity cheque and new debt.
A full debt schedule for buyout loans, including interest and amortisation.
FCFF and FCFE that reflect the leveraged structure.
Equity IRR and Money Multiple for the financial sponsor.
You will usually create this as a separate model that represents the post transaction structure.
Duplicate the operating model for LBO use
Identify your best quality operating model for the target company.
Duplicate it in your workspace and rename the copy, for example:
TargetCo - LBO Base Case.
In the LBO model copy:
Preserve all operational assumptions (revenue, costs, capex, working capital).
You will only modify capital structure and transaction specific items.
This preserves a clean base model and isolates LBO changes.
Define the transaction structure
Decide the key LBO terms:
Enterprise value (EV) or equity purchase price.
Proportion funded by new debt versus equity.
Any fees you want to model explicitly (transaction fees, financing fees).
Closing date, aligned with your model periods.
In the LBO model:
Create an Equity variable representing the sponsor equity cheque:
Name:
Equity - Sponsor Injection.Timing: closing period.
Amount: equity cheque.
If you want to explicitly model acquisition costs:
Create Opex or Asset variables for transaction fees.
Decide whether to expense or capitalise them.
These variables capture the funding and immediate cost of the deal.
Add new LBO debt tranches
Typically you will have one or more of:
Senior term loan.
Second lien or mezzanine.
Revolver (optional).
Shareholder loans or PIK style instruments (optional).
For each tranche:
Create a Liability variable in the relevant branch (usually the HoldCo or Group branch):
Name: for example
Debt - Senior Term Loan.
Configure the loan:
Principal amount.
Interest rate (fixed or driver based).
Interest payment frequency.
Amortisation pattern:
Interest only with bullet.
Straight line principal repayments.
Custom schedule using a driver.
Set timing:
Drawdown date = transaction closing.
First interest payment date aligned with loan agreement.
Check the preview for interest and principal movements over time.
Link loans to valuation cashflows
Model Reef automatically routes loan behaviour into the statements:
Interest Expense → P&L.
Loan Drawdowns and Repayments → Cashflow Statement and Cash Waterfall.
Loan Balances and any Interest Payable → Balance Sheet.
To prepare for equity analysis:
Open the Cash Waterfall.
Confirm you can see:
EBITDA.
Change in Net Working Capital.
Tax Paid.
Capex.
Interest Paid.
Debt Drawdowns and Repayments.
Ensure these patterns match your expectations from the LBO terms.
The Cash Waterfall is your primary tool for understanding the levered cashflows.
Configure equity cashflows and exit
An LBO requires explicit equity flows:
Equity investment at entry:
Already captured via
Equity - Sponsor Injection.
Optional dividend recaps:
Create Dividend variables if you plan to distribute cash prior to exit.
Exit event:
Decide an exit date within your model horizon.
Decide exit EV or exit equity value assumptions.
You can represent exit in two ways:
As an explicit Dividend in the final period equal to equity sale proceeds.
Or as a terminal equity value in the FCFE valuation.
For simplicity, many LBO models:
Treat exit as a large equity cash inflow equal to:
Equity value at exit minus any remaining debt.
This can be captured using a dedicated Dividend variable in the exit period.
Set valuation assumptions for the LBO
In the LBO model:
Open Valuation settings.
For FCFF analysis:
Set WACC consistent with the levered capital structure.
For FCFE analysis:
Set an Equity discount rate representative of sponsor return targets.
Configure terminal value:
Often via an exit multiple:
Choose an EBITDA or FCFF multiple at exit.
Or via a modest long run growth assumption on FCFE.
This enables both enterprise level and equity level valuations.
Review equity IRR and Money Multiple
Model Reef will compute:
Project IRR using FCFF and enterprise level cashflows.
Equity IRR using FCFE and equity cashflows, including entry and exit.
Money Multiple as the ratio of discounted equity inflows to outflows.
Payback period on the equity cheque.
Check that:
Entry equity outflow is correctly captured in the timeline.
Exit or terminal equity inflow is captured only once.
Debt principal is fully repaid or correctly outstanding at exit for your structure.
If equity IRR or Money Multiple are unusual, revisit debt, exit and equity cashflow assumptions.
Build alternative LBO scenarios
Because each scenario is a separate model, you can create alternative LBO cases by duplicating the LBO base model:
TargetCo - LBO - Low Leverage.TargetCo - LBO - Base Leverage.TargetCo - LBO - High Leverage.TargetCo - LBO - Downside.
Within each variant adjust:
Leverage levels.
Interest margins.
Exit multiple and timing.
Operating performance assumptions.
Compare equity IRR and Money Multiple across these models to understand risk and upside.
Check your work
New debt variables draw and amortise according to your term sheets.
Interest expense and cash interest are correctly reflected in P&L and Cashflow.
Equity cheque and exit proceeds are modelled as equity cashflows.
FCFF and FCFE series make sense post leverage.
Equity IRR and Money Multiple are in a plausible range.
Troubleshooting
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