So In short, you purchase a company with debt and equity combination. Improve performance of the company, also serve the debt using internal cash flows of the company for sometime. After company's Financials improve and get well off then sell it, at higher valuation in turn paying off debt and having excess of income from sell.
Very excited to launch our latest video which covers one of the most common LBO-related questions for Investment Banking and Private Equity interviews. Let us know if you have any questions!
We have both a DCF video and this LBO video. It’s intentionally tight in the explanation here. I wouldn’t go any deeper in an interview as a starting point, there’s very little upside in that.
You take the (ending value - beginning value)/beginning value to get the return rate. Then you use the formula ((1 + return rate) ^ (1 / number of years)) - 1. In this case it would be: return rate = (100 - 50) / 50 = 1 annualized rate of return = ((1 + 1) ^ (1 / 5)) - 1 = 0.148 which is approximately 15% Hope that helps
Im confused with ine thing. The 100 dollars left after devtors is paid doesnt all go to the owner right? The firms or individuals that purchased equity and essentially fascilitated the $50 equity financing would recieve their share if the return, correct? So owner would recieve their share of profit. Or by owner are yiu reffering to all owners, i.e all those with equity in the business
Yup, from what I know, the person who provided the equity financing would receive the share (i.e. the owners who are shareholders, owning equity in the business).
For the first answer to this question in an interview…I wouldn’t go any deeper than this…you want to start at a high level and then let them pull you into the weeds. After that though, they can take this to any level of depth they choose. If you want to be sure to answer everything…your best bet is to learn how to build a full LBO model front to back
Great video and well explained thank you! What happens to the remaining $30 of debt when you sell? Will it just stay as debt in the firm when selling or must it be repaid prior?
Hey Tudor, think of the Debt as being like a mortgage on a house. When you sell your house, if you have a mortgage, you have to pay it off. In the same exact way....in an LBO, the lenders who originally lent to you will require you to repay your outstanding Debt. Does that make sense?
you're the only one that makes it so clear, thank you so much !!
Glad you found it helpful! Btw, we have an even deeper dive article on this here: finance-able.com/walk-me-through-an-lbo/
Mike, this is the best explanation of an LBO I’ve ever seen. Thank you!
You are a god send with explaining this stuff! Thank you man!
Glad you found it helpful Youssef! We have even more free deep-dive content here: finance-able.com/analyst-starter-kit/
So In short, you purchase a company with debt and equity combination. Improve performance of the company, also serve the debt using internal cash flows of the company for sometime. After company's Financials improve and get well off then sell it, at higher valuation in turn paying off debt and having excess of income from sell.
That is spot on. It’s very much the same thing as when you buy a house improve it and sell it.
Great video!
These videos are incredible! Makes it very easy to understand.
We worked really hard to make these concepts simple. Glad you found it helpful!
Very excited to launch our latest video which covers one of the most common LBO-related questions for Investment Banking and Private Equity interviews. Let us know if you have any questions!
Need a more detailed explanation just like the DCF video.
We have both a DCF video and this LBO video. It’s intentionally tight in the explanation here. I wouldn’t go any deeper in an interview as a starting point, there’s very little upside in that.
@@FinanceableTrainingI wouldn’t either and I wouldn’t want my interviewees to either. I just need to know if you understand the concept
Fantastic explanation
Thank you so much! This made it all so clear!
Really clear explanation and very helpful
Thanks so much @nathanheide8937!
great lecture.
Glad you found it helpful!
Can you please tell me how you calculated the annualized rate of return?
You take the (ending value - beginning value)/beginning value to get the return rate. Then you use the formula ((1 + return rate) ^ (1 / number of years)) - 1. In this case it would be:
return rate = (100 - 50) / 50 = 1
annualized rate of return = ((1 + 1) ^ (1 / 5)) - 1 = 0.148 which is approximately 15%
Hope that helps
Great structure!
Thank you!
wow! That was so precise and clear! Thank you.
Glad you found it helpful!
Very well simplified. Thank you!
Glad it was helpful!
Very helpful video! I learned so much 😊
Im confused with ine thing. The 100 dollars left after devtors is paid doesnt all go to the owner right? The firms or individuals that purchased equity and essentially fascilitated the $50 equity financing would recieve their share if the return, correct? So owner would recieve their share of profit. Or by owner are yiu reffering to all owners, i.e all those with equity in the business
Yup, from what I know, the person who provided the equity financing would receive the share (i.e. the owners who are shareholders, owning equity in the business).
keep it up! great vid
Explained so well, thank you!
Glad it was helpful!
Unironically how can do get your polo?
your awesome man
Think of an LBO like a mortgage!
Nice!
How much more in depth would you have to go during an interview?
For the first answer to this question in an interview…I wouldn’t go any deeper than this…you want to start at a high level and then let them pull you into the weeds. After that though, they can take this to any level of depth they choose.
If you want to be sure to answer everything…your best bet is to learn how to build a full LBO model front to back
Nice video!
Thnaks Natalie!
Great video and well explained thank you! What happens to the remaining $30 of debt when you sell? Will it just stay as debt in the firm when selling or must it be repaid prior?
Hey Tudor, think of the Debt as being like a mortgage on a house. When you sell your house, if you have a mortgage, you have to pay it off. In the same exact way....in an LBO, the lenders who originally lent to you will require you to repay your outstanding Debt. Does that make sense?
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