Key Assumptions in an LBO

Key Assumptions in an LBO

• A. EV / LTM EBITDA at exit
• B. Debt on BS
• C. Cash on BS
• D. EBITDA at Exit

Answer: (D)

In an LBO, the value you realize at exit hinges on how much EBITDA the business is generating when you plan to exit. The exit enterprise value is the EBITDA at exit multiplied by the assumed exit multiple, so forecasting the EBITDA you’ll have at that point directly drives the expected equity value. The exit multiple is important, but you can’t compute the exit value without a projected EBITDA at exit, making this assumption the most influential lever in the model. Debt and cash on the balance sheet are outcomes of the financing plan and operating results, not the primary driver of the exit value. A higher EBITDA at exit directly inflates the exit value and thus the returns.

In an LBO, the value you realize at exit hinges on how much EBITDA the business is generating when you plan to exit. The exit enterprise value is the EBITDA at exit multiplied by the assumed exit multiple, so forecasting the EBITDA you’ll have at that point directly drives the expected equity value. The exit multiple is important, but you can’t compute the exit value without a projected EBITDA at exit, making this assumption the most influential lever in the model. Debt and cash on the balance sheet are outcomes of the financing plan and operating results, not the primary driver of the exit value. A higher EBITDA at exit directly inflates the exit value and thus the returns.