Leveraged Buyout (LBO) Calculator

What is an LBO?

A leveraged buyout (LBO) is the purchase of a company paid for largely with borrowed money. A private equity sponsor puts in some equity, banks or credit funds lend the rest, and the debt sits on the company being bought. For several years the company's cash flow repays that debt. At exit the sponsor sells the business, pays off what is left of the debt and keeps the rest. The LBO model answers one question: what annual return (IRR) and what multiple of its money (MOIC) does the sponsor earn?

When do you use it?

Private equity funds use LBO models to decide how much they can pay for a company while still reaching their target return, often 20% or more. Banks use them to judge how much debt a business can carry. In M&A, a seller's adviser runs one to estimate what financial buyers might bid.

How to read the output

In the fictional Harbour Packaging case, a sponsor pays 10x EBITDA (1,100), borrows 5x (550) and puts in 572 of equity including fees. After five years, EBITDA has grown to 147 and debt has fallen to 278. Selling at 10x gives exit equity of 1,194: a MOIC of 2.09x and a sponsor IRR of 15.9%. As a rough guide, an IRR above 20% is attractive for a buyout, 15% is acceptable and below 10% is weak for the risk taken.

The value creation bridge splits the equity gain into its sources: EBITDA growth, multiple expansion (selling at a higher multiple than you paid), and debt paydown, less transaction fees. Growth and cash generation are more convincing than a higher exit multiple. Harbour has no multiple expansion at all.

The sensitivity table shows IRR for entry multiples half a turn and one turn either side of your input (rows) against exit multiples one and two turns either side (columns). Cells where exit equals entry show the return without any multiple change. For Harbour, paying 11x and selling at 8x drops the IRR to about 6%.

Common mistakes

• Assuming a higher exit multiple. Exiting above the entry multiple flatters returns; the safer base case is exit equal to entry.
• Entering leverage as a percentage. Debt/EBITDA is a multiple: 5 means five times EBITDA, not 5%.
• Too much debt. More leverage raises IRR on paper, but also the risk that cash flow cannot cover interest.
• Forgetting fees. Fees are paid with equity and reduce the return.
• Confusing a high MOIC with a good IRR. 2x over five years is about 15% a year; 2x over ten years is only about 7%.

Limitations

There is one debt tranche with a single interest rate and a 100% cash sweep; real deals have several layers of debt, mandatory repayments and covenants. There are no dividends, management equity, add-on acquisitions or minimum cash balance. The holding period is fixed at five years and all equity goes in at the start and comes out at exit.

FAQ

Why does debt increase returns?

The sponsor puts in less of its own money, so the same gain in company value is a larger percentage of the equity.

What does the average-debt toggle do?

It charges interest on the average of opening and closing debt instead of the opening balance, which is slightly more precise.

What if debt goes below zero?

The debt is fully repaid and the surplus cash counts as net cash at exit.

Is MOIC or IRR more important?

Both: IRR measures speed, MOIC how much money you make.

Educational use only. Not financial advice. Exact formulas: see the Methodology page