347 647 9001+1 714 797 8196Request a Call
Call Me

What Makes a Good Leveraged Buyout

November 27, 2013
, ,

This blog is an extension of our blog on Dell’s Leveraged Buyout.

In the previous article, we discussed the importance of LBO with a hypothetical example on how a financial institution benefited in two different scenarios from a purchasing out a company. But to find these kinds of benefits from an LBO, there are some perquisites which make a good LBO. The list is endless but there are some important factors which are mentioned here:

1. Clean Balance Sheet with little/no debt: A company with a small amount of debt can become an LBO candidate since the acquiring company gets room to raise debt or leverage it without taking the burden of the candidate’s debt.

2. Steady and predictable cash flow: The acquirer needs to forecast the future cash flows as he raises a huge amount of debt to buy the target company and plans to pay a substantial amount of this debt using the cash flows of the target company before making an exit.

3. Divestible Assets: The acquirer looks for non-core or non-operating assets that can be divested to pay off the debt.

4. Viable exit opportunity: An institution always looks at any transaction from the perspective of generating returns on it; this applies to an LBO model too. The investor will look for a hassle free exit opportunity.

These are some of the many important factors that an investor considers to find a good candidate for an LBO. You can more learn about this through our video on what makes a good LBO by downloading it from here!

Finding an LBO candidate

Finding the perfect LBO candidate is a tough task from the universe of equities and requires a great amount of data to be collected and analyzed to fit the perfect match. To give a brief idea on how to search for a company from such a huge universe can be understood by taking an exercise. We extract the data of nearly 700 well known companies in the US & Europe in the form of Market Cap, Enterprise value and the Free Cash flow to the firm.

#Leveraged Buyout

Data of well known companies in the US & Europe

Analyzing the data

With the above data we analyze some important ratios to carry on our search for the right LBO candidate. Ratios such as Equity/Enterprise are used to understand the depth of leverage a company is currently positioned at. The higher the ratio, the lower the company is leveraged on its balance sheet. Similarly important valuation matrix such as EV/EBIDTA and EV/Free cash flow are calculated and help in judging the right company for taking over.

Once we have the figures for the multiples calculated we sort out the companies which have a positive EV/Free cash flow but less than a multiple of 4. Also as discussed previously in the first paragraph above the factors to be considered to get a good LBO candidate can be implemented in a better way in this small exercise.

#Leveraged Buyout

Out of the given data, we search for companies which have positive EV/Free cash flow, an Equity/Enterprise value of more than 100% and a high enterprise value, which can be seen in the above figure highlighted. In this case we extracted the information based on the criteria and was able to find healthy companies to fit for the LBO and thus selected the Dell model since it matches all criteria.

You can learn about analyzing the information from the data and also on selecting the best LBO candidate with the help of the video (why Dell) by downloading it from here.

There will be more blogs on the same topic. So stay tuned for more!


About the Author

Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.

Popular Blogs: Whatsapp Revenue Model | CFA vs CPA | CMA vs CPA | ACCA vs CPA | CFA vs FRM

Post ID = 41215