A Leveraged Buyout occurs where a company is acquired with funds comprised of a significant amount of debt. The assets of the two companies are utilized as collateral. This allows the purchaser to reduce the amount of equity invested and instead fund the purchase with debt. An LBO Model enables investors to thoroughly evaluate the transaction and the risk attached to it. This LBO Model is comprised of:
- 3 statement and operating model
- Operating scenarios
- Transaction assumptions
- Debt and interest schedule
- Levered IRR analysis by investor type
- Sensitivity analysis
- Bank debt – the least expensive form of financing instrument, and with a lower interest rate. However, banks are wrapped in red tape, which can restrict a company.
- High Yield Debt/ Subordinated Debt – typically an unsecured debt, carrying a higher interest rate than the Bank Debt. Where liquidation occurs, Bank Debt is also paid before the High Yield Debt.
- Mezzanine Debt – often funded by hedge funds and private equity investors, with a higher interest rate than the others.