LBO Valuation Calculator

The LBO Valuation Calculator is designed to help business owners understand the concept of leveraged buyouts (LBOs) and how they operate within private equity. An LBO involves acquiring a company primarily using borrowed funds. The acquired company's cash flow is then used to repay the debt over time. This tool helps business owners evaluate the viability and potential returns of an LBO, providing insights into how such transactions might affect their business.

How to Use the LBO Valuation Calc

Step-by-Step Guide:

1. Industry‍
   • Select the industry in which your business operates. Be mindful that economic conditions and market demand can significantly influence performance.
2. TTM ("Trailing Twelve Months") Revenue
   • Enter your company's total revenue for the past year. This information will be used to evaluate your financial health and potential for growth.
3. TTM Revenue Growth
   • Specify your recent revenue growth rate. A high rate can indicate strong market demand and the ability to expand, which is favorable in an LBO scenario.
4. NTM ("Next Twelve Months") Revenue Growth
   • Choose the expected revenue growth rate for the next year as high, medium, or low. This helps evaluate future business prospects and strategic planning.
5. Adjusted EBITDA (Proxy for Cash Flow)
   • Enter your adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
   • To approximate adjusted EBITDA, start with your net income and add back interest, taxes, depreciation, amortization, and any one-time expenses.
     • This metric is a crucial indicator of your business's operational efficiency, as it reflects your company's ability to generate profit from its core operations by excluding one-time expenses and non-recurring items.
6. NTM EBITDA Margin Improvement
   • Specify the expected change in your EBITDA margin over the coming year as high, medium, or low. This indicates potential improvements in cost management or operational efficiencies.
7. Revenue Mix
   • Identify your revenue drivers as recurring or non-recurring; the former can offer stability and predictability, making your business more attractive to buyers or investors.
8. Employee Stability
   • Assess the turnover rate of key employees. A low turnover rate implies management stability, which is beneficial for maintaining consistent business performance.

Programmatic Details (if interested)¹

The calculator outputs base, management, and downside scenario estimates, which together provide a discrete valuation range.

The calculator uses a differential evolution optimizer. This sophisticated algorithm flexes revenue growth, EBITDA margin changes, debt percentages, and IRR requirements to back into an optimal purchase price. Static inputs, such as standard private equity holding periods and cash flow assumptions, further refine these valuations.

These processes are CPU-intensive, requiring numerous computational runs for each scenario. By averaging the base scenario, maximizing the management scenario, and minimizing the downside scenario, the calculator ensures robust and reliable estimates.

¹ This LBO valuation calculator is proprietary. Please respect intellectual property rights.

Understanding LBOs in Private Equity

For business owners, understanding LBOs can be crucial if considering selling the business or attracting private equity investment. Private equity firms use LBOs to enhance the financial performance of acquired companies, aiming to sell them later at a profit. This calculator helps determine if your business can generate enough cash flow to handle additional debt from an LBO, while providing attractive returns to investors.

By inputting key financial figures and growth forecasts, you can explore different scenarios and better understand your business's value in an LBO context. Similar to the Broker Assessment, this tool is conceptually sound, but by no means bulletproof. If the results pique your interest and you'd like to discuss working together, please send me an email at brendan@e115advisory.com, or call me at +1 781 910 7781.