Glossary
LBO Modeling
Every term in the track, defined in plain English. These definitions also pop up when you hover the dotted terms inside lessons - and feed your flashcard review.
Concepts
- Leveraged buyoutLBO
- Acquiring a company with mostly debt and a smaller equity check; the target's cash flows repay the debt.
- Leverage
- The use of debt to fund a purchase, quoted in turns of EBITDA. It amplifies equity returns and risk.
- Net debt
- Total debt minus cash. Subtracted from enterprise value to get equity value.
- Hold period
- How long the sponsor owns the company before exiting, typically around five years.
Players
- Sponsor
- The private equity firm that provides the equity, controls the company, and targets a return.
- Management rollover
- When existing management reinvests part of their proceeds into the new equity, aligning incentives.
Structure
- Sources & uses
- The funding table: uses (price, fees, min cash) must equal sources (debt tranches + equity).
- Equity check
- The sponsor's equity investment - the plug that makes sources equal uses after debt is sized.
- Debt tranche
- A layer of debt with its own terms (e.g. term loan, high-yield bonds), each priced for its risk.
Debt
- Cash sweep
- Using available free cash flow to repay debt ahead of schedule, accelerating deleveraging.
- Deleveraging
- The reduction of net debt over the hold; transfers value from lenders to equity even if EV is flat.
Returns
- Entry multiple
- The EV/EBITDA paid at purchase.
- Exit multiple
- The EV/EBITDA realized at sale. Selling above the entry multiple is multiple expansion.
- Multiple expansion
- Exiting at a higher EV/EBITDA than entry - the most powerful but least controllable return lever.
- MOIC
- Multiple of invested capital: exit equity divided by entry equity. Ignores time.
- IRR
- Internal rate of return: the annualized return on the equity, which accounts for time.
- Returns attribution
- Decomposing the change in equity value into EBITDA growth, multiple expansion, and debt paydown.