Knowledge Capsule: Leveraged buyout models (LBO)

Leveraged buyout models are often used by private equity firms or venture capital firms as a financial tool to help evaluate “Buy or Don’t Buy” decisions. This model assumes that we will exit in the future at a specific time and that the initial investment will be split between equity (own funds) and debt (borrowed funds). The interest on debt is a tax-deductible expense, which will provide leverage to our capital structure. The debt will be secured by the assets of the company we are buying.

Step 1: Arrive at Purchase Price

I have used an EBITDA multiple to arrive at the purchase price. The multiple used can vary according to the business of the company. Based on our knowledge of the industry and the company, let’s say we believe that the value of the company today is 5 times its EBITDA.

Step 2: Debt and Equity

We bifurcate the purchase price into debt and equity components.

Step 3: Interest Schedule till Exit Period

We prepare an interest schedule till exit period to ascertain interest charge for each year.

Step 4: Projected Income Statement till Exit Period

Based on data we have, we can compute the projected income and profits for subsequent periods till exit period.

Step 5: Projected Free Cash Flow till Exit Period

We ascertain the free cash flow that will be available each year for the equity holders to withdraw from the business because the income statement is based on accrual system while Free Cash Flow represents the money that will be available to be withdrawn.

Step 6: Compute the Exit Value

Based on the EBITDA of the exit year, we can compute the exit value of the company as an EBITDA multiple.

Step 7: Debt and Equity Value at Exit

The debt should be repaid fully by the time of exit. So the exit value of the company is in fact its equity value.

Step 8: Adjust for equity flows received during the years

Equity value should be increased by the annual equity cash flows received from the company.

Step 9: Arrive at Rate of Return on Investment

We can use different tools like MoIC, Rate of Return or NPV to understand if our investment is viable.

This is the theoretical background to understand the logic of LBO. The excel model gives you a case study to understand how this model works. This model has been kept simple to help non-finance users also gain value. A Sensitivity Analysis can also be made to analyse the exits at different periods while also factoring in different values of Exit Multiples but I felt that it would add to the complexity of the model.

My Take: Financial modeling is ultimately an exercise in “logical crystal ball gazing” based on assumptions which may or may not prove to be true in the future. Discount rate, use of relevant valuation multiple, growth metrics of the business are all assumptions at the end of the day. Despite this inherent uncertainty, a model serves as a vital “sanity check”—a disciplined starting point for articulating exactly why you’re making a move.

Spreadsheet link: Excel LBO model

This article is part of An Accountant Writes, Vol 1, Issue 2 — February 2026. Read the full issue