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Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity, + Website by Paul Pignataro

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PART Two

Leveraged Buyout Full-Scale Model

If you have read the previous chapters several times, you have a good understanding of the leveraged buyout (LBO) theory. At the end of the last chapter we spoke about weaknesses of a simple leveraged buyout analysis, which warrant the need for a full-scale model. However, a simple analysis can be great for giving a rough indication of whether the investment is even worth looking at further.

A full-scale model does have major benefits:

  • Detailed projections. If you are really serious about buying the business, there needs to be complete projections with every line item in the income statement, cash flow statement, and balance sheet broken out. This level of detail is helpful to really understand the business’s finances.
  • Balance sheet adjustments. We will soon discuss the importance of showing the balance sheet after the investment has been made including all the new debt and equity used to fund the purchase.
  • Debt schedule. The fact that a full-scale model contains a debt schedule, which calculates interest expense and flows into the three statements, is key. We will prove its importance as we step through the Heinz case.

Recall Step 3 in the LBO simple analysis, the calculation of exit debt. A full-scale model that is properly linked completely through will contain a debt schedule that will handle the paying down and adjustments of debt and interest. So you will see that, when we have a full-scale model, we don’t need to make all the ...

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