Background
The Corpfin.Net LBO valuation model operates on the five-year financial forecast of a business. The purpose of the model is to estimate the current value of the business to a "financial buyer", based on the businesses' historical and forecasted financial performance.
The already- completed five-year financial forecast, plus a few assumptions, is all that is necessary to create your first draft of two comprehensive LBO valuation cases. The software uses leverage buyout ("LBO") methodology whereby the acquired business's assets are used as collateral for borrowings undertaken by the buyer to fund a portion of the purchase price.
The LBO valuation model analyzes the value of the business from the point of view of a "financial buyer" which owns no other company in the businesses' industry and, therefore, expects all of its investment return to result solely from the future operations of the business being purchased.
The LBO valuation model assumes that the buyer has investigated the business and its future plans and believes the business will achieve the financial results forecasted.
In general, the LBO valuation represents the minimum current value of the business since buyers who already own similar or complimentary businesses will usually pay more for a given business than will a financial buyer.
From a timing standpoint, the LBO valuation model assumes that the financial buyer intends to purchase the business at the beginning of year two (2) of the five-year forecast; and intends to own the business for the ensuing four (4) years and then sell the business.
In order to generalize the analyses across a potentially infinite range of "deal" attributes, the model assumes the financial buyer is buying only the assets of the business and is assuming none of its liabilities. Therefore, the seller of the business needs to pay off all of the liabilities of the business (and in all likelihood, the income tax owed as a result of the gain realized on the sale of the assets) from selling price paid by the financial buyer.
If a buyer were to assume any of the liabilities of the seller, the usual adjustment is to reduce the cash amount paid to the seller, dollar-for-dollar, by the amount of the liabilities assumed by the buyer.
Developing Each of Two LBO Cases
Step 1. | Review / change the financial forecast on which the LBO valuation is to be based. The LBO valuation is based on the selected, already completed five-year financial forecast. Changes to the financial forecast assumptions (depending on their flow-through to a new owner) may modify the results of previously completed LBO cases. |
Step 2. | On the LBO Setup Page, enter the two LBO assumptions that affect all LBO cases. Enter the following two assumptions. These assumptions are default assumptions for all subsequent runs of the LBO analysis: · The estimated auction value of Plant, Property and Equipment. · The dollar amount, if any, of operating expenses that will or will not be incurred by the buyer after the buyer purchases the business. Once this data is entered, the LBO model creates a copy of your designated five-year financial forecast scenario; and two LBO valuation cases, using model-supplied default assumptions. |
Step 3. | Complete the "Case 1" LBO valuation. "Case 1" approaches the LBO analysis from the business buyer's standpoint. The model determines the selling price of the business, given the buyer's specific rate of return objective on its equity investment in the business. Enter four assumptions to create the first draft of Case 1: · The dollar amount of the selling price the seller is willing to finance. · The annual rate of return ("ROR") objective of the buyer on its equity investment in the business. · The estimated EBITDA multiple to be used determine the selling price of the business at the end of the buyer's four years of ownership. · An estimate of interest rates to be paid on senior (bank) debt and subordinated debt. The default assumptions listed on the setup screen for Case 1 are intended to be reasonable starting points for the analysis. They are not represented to be "correct" and, as such, are not warranted in any way whatsoever by Corpfin.Net |
Step 4. | Complete the "Case 2" LBO valuation. "Case 2" approaches the LBO analysis from the business seller's standpoint. The model determines the buyer's rate of return (ROR) on its equity investment in the business, given the seller's specific selling price objective. A selling price objective that results in a low ROR on the equity investment of the buyer implies that the selling price objective may be too high. Four assumptions are needed to create the first draft of Case 2: · The dollar amount of the selling price the seller is willing to finance. · The selling price objective of the seller. · The estimated EBITDA multiple to be used determine the selling price of the business at the end of the buyer's four years of ownership. · An estimate of interest rates to be paid on senior (bank) debt and subordinated debt. The default assumptions listed on the setup screen for Case 2 are intended to be reasonable starting points for the analysis. They are not represented to be "correct" and, as such, are not warranted in any way whatsoever by Corpfin.Net. |
LBO Valuation Reports
The following reports are available for LBO Cases 1 and 2:
· A multi-page, case-specific narrative report that details the results of the LBO analysis.
· Estimated LBO Valuation -- Summary. The report contains detailed estimates of:
· The seller's outcome, including its estimated pretax sales proceeds.
· The buyer's outcome, including its sources and uses of funds; the estimated amount and terms of debt financing (including subordinated debt with warrants); the equity investment required; and the return on the equity investment after four years of ownership.
· Primary financial statements (annual income statements, balance sheets and cash flow statements) showing the businesses' financial performance when owned by the buyer.
· Several pages of documentation detailing the key assumptions underlying the valuation; and actual and forecasted financial ratio data and statistics.
Additional Analyses
The LBO model allows you to run and save as many iterations of your work as desired.
If you wish to analyze how the LBO valuation of the business changes based on changes to the underlying five-year financial forecast of the seller’s business, change the financial forecast assumptions (sales growth, gross margin percent, etc.) for the business and re-run the LBO valuation case(s) based on the revised forecast.
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