Topic 44

Valuing the Leveraged Buyout

Topic 44 explores the steps to value the leveraged buyout (LBO) employing the methodologies presented in the previous topics and discusses how large leveraged deals are priced in auction transactions.

The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this Topic or are available for review and download on the companion Web site noted at the end of this Topic.


  • The steps to value a (LBO) transaction are presented in Appendix 44.1.

    1. Identify expected risk-adjusted as-is unlevered free cash flow (FCF) for the target resulting from deal value drivers and resulting earnings before interest, tax, depreciation, and amortization (EBITDA; Appendix 44.2(h) and 44.2(j), line 44). See also Appendix 39.3, which presents the FCF determination using the earnings before interest and tax (EBIT; net operating profit after tax [NOPAT]) approach and the EBITDA approach as discussed in Topic 22.

    2. Construct unlevered cost of equity, CU, for this business (Appendix 44.2(f), line 15) (see Topics 23 and 37).

    3. Value the unlevered FCF during the T period (Appendix 44.2(c), lines 8–14) and the terminal value perpetuity (Appendix 44.2(c), lines 3–5).

    4. Identify excess cash or equivalents to come with the deal (Appendix 44.2(c), line 34).

    5. Determine ...

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