LBO model

Meet Orion Packaging Inc., a synthetic US industrial, in $m throughout. LTM EBITDA is $100, growing 6%/year. D&A is $25 flat, capex is $25 flat at maintenance level, ΔNWC is $3/year and tax is 25%. You buy it at 8.0× LTM EBITDA, cash-free/debt-free.

How do you set up sources and uses?

Step 1: Sources & uses. On the uses side you have purchase enterprise value of 800 plus transaction and financing fees of 24. That's 3% of TEV, paid to the advisors, the lawyers, the lenders. A real model splits and amortizes the financing fees, but we expense them at close to keep things clear. Sources are a Term Loan B of 400 (4.0× EBITDA, 8.5% rate, 5%/year mandatory amortization), a $50 revolver that's undrawn at close and costs 8.0% when drawn, and sponsor equity as the plug.

In cells, Equity = Total uses − Term loan − Revolver draw. Build the check Sources − Uses = 0, and format it to scream if it's false. Entry leverage is 4.0×, and entry equity of 424 is 53% of TEV. That's moderate by LBO standards. At 60% debt, the toy deal was racier, and post-2008 large-cap deals typically run 40 to 60% debt.

How do you model cash flow and the debt waterfall?

Step 2: the operating engine and CFADS. Each year, compute cash flow available for debt service the simple way, CFADS = net income + D&A − capex − ΔNWC. Interest is already deducted in NI, and an LBO pays no dividends, so every dollar goes to work.

Step 3: the debt waterfall. Hard-code the priority order into the formulas:

1. Pay cash interest.
2. Pay mandatory term-loan amortization (5% × original = $20/yr).
3. Repay any revolver balance.
4. Sweep 100% of the remaining cash into optional term-loan prepayment.

A revolver exists for the opposite flow. If CFADS can't cover mandatory amortization, you draw the shortfall. For the term-loan row, the key formulas are Interest = 8.5% × beginning balance, Mandatory = MIN(20, beginning balance), Sweep = MAX(0, MIN(CFADS − mandatory − revolver repayment, balance after mandatory)) and Ending = beginning − mandatory − sweep. For the revolver it's Draw = MAX(0, mandatory − CFADS). Charging interest on the beginning balance kills the interest circularity you fought last week. Using an average balance instead needs iterative calculation switched on.

This is the full schedule for the base case:

D&A and capex cancel at $25 each, so the +D&A − capex − ΔNWC line nets to −3.0, which is the NWC build. Watch the flywheel in the interest row. Paydown means less interest. Less interest means more CFADS, which pays down debt faster. That self-accelerating loop explains why LBOs go after boring, cash-generative businesses. Think packaging. Biotech doesn't fit.

How do you calculate MOIC and IRR at exit?

Step 4: exit and returns. Exit at the end of year 5 at the entry multiple, because you don't underwrite expansion. Exit EV = 8.0 × 133.8 = 1,070.6. Take off the ending debt of 163.0 and you get exit equity of 907.6. All the interim cash was swept, so none accumulated.

MOIC = 907.6 / 424 = 2.14×
IRR  = 2.14^(1/5) − 1 = 16.4%

In cell form, the equity cash-flow row is (−424, 0, 0, 0, 0, +907.6), the IRR is =IRR(B50:G50) and MOIC is =G50/-B50. Always show both. IRR rewards speed, so a 1.5× in 18 months is a 31% IRR and a forgettable amount of money. MOIC rewards scale, so a 2.1× over 7 years is an 11% IRR and a yawn. A sponsor needs both above the hurdle.

The value-creation bridge ties to the penny:

How much does leverage add, and what should you check?

Now compute the leverage contrast. Buy the same asset all-equity, with 824 out the door. Pocket its unlevered FCF of 57.8, 62.5, 67.6, 72.9 and 78.6, which totals 339.4, and sell at 1,070.6. You get MOIC 1.71× and IRR 12.7%. Nothing changed in the business or the exit. Leverage lifted the IRR by ~3.7 points and the MOIC from 1.71× to 2.14×, and that's the rent equity collects for taking the first-loss seat. Reprice the deal 20% cheaper or grow EBITDA faster, and the gap widens. Stumble once, and the reverse gear from the toy deal engages. Worked example 1 stress-tests that case, with the revolver doing its job.

Build these checks into the tab. They're the LBO block of the model-suite audit at the end of the core content. Sources = uses. Term loan and revolver ≥ 0 every year, since a negative debt balance means your sweep formula ignores the balance cap. Revolver draws happen only when CFADS < mandatory. Interest = rate × beginning balance, and you state that convention on the tab. Exit equity = exit EV − ending net debt, and the bridge ties to exit equity to the penny.