Leveraged Buyout Model (LBO Model): Step-by-Step Excel Guide + Template Workflow

If you’re learning private equity modeling, the Leveraged Buy Out Model (LBO Model) is the one framework almost every finance student is curious about — and it’s also one of the most tested models in interviews.

If you’re learning modeling for interviews and placements, start with our complete Financial Modeling Course with Placement

But here’s the truth: an LBO model is not difficult because of Excel.

It becomes difficult when you don’t understand:

• cash flow logic
• debt mechanics
• entry vs exit valuation
• working capital adjustments
• investor returns (IRR + cash multiple)

In this guide, I’ll walk you through the same practical LBO model template structure used in my video tutorial — with the core logic explained clearly, step by step. Download Template

What Is a Leveraged Buyout Model?

A leveraged buy out Model (LBO) is when a private equity firm buys a company using a large portion of debt, then uses the company’s cash flows to repay that debt over time.

At the end of the holding period, the PE firm exits through:

• selling the business to another buyer, or
• an IPO, or
• partial stake sale + retained ownership

LBO explained using a Real Estate example (simple intuition)

LBO mechanics are very similar to buying real estate using a home loan:

Real estate

• Property already exists
• Generates rent
• You use debt to buy it
• Use rent to pay interest + principal
• Exit by selling later

LBO

• Company already exists
• Generates operating cash flow
• You use debt to acquire it
• Use free cash flow to pay interest + principal
• Exit by selling later / IPO

That’s why LBO models are ultimately cash-driven.

Why Balance Sheet is Not Always Critical in an LBO Model

In many interview-style LBOs (and quick case studies), you may not build a full balance sheet because your focus is:

• entry price
• debt schedule + repayment
• cash generation
• exit value
• investor returns

So a simplified LBO commonly uses 3 key parts:

1. Income Statement projection
2. Cash flow build
3. Debt schedule + investor returns

(You still model working capital changes — just without a full balance sheet.)

Key Assumptions Used in This LBO Model Example

In this template scenario (from the tutorial), the business has:

Operating assumptions

• LTM Revenue: 200 million
• LTM EBITDA: 50 million
• Revenue Growth: 10% per year for 3 years
• EBITDA Margin: 25% constant
• D&A: 5% of sales
• Tax Rate: 20%

Working capital + Capex assumptions

• Inventory: 10% of Sales
• Receivables: (given in sheet)
• Payables: (given in sheet)
• Capex: 5–7% of Sales (as per assumption sheet)

Exit assumptions

• Exit EBITDA Multiple: 8x at Year 3
• Ownership: 100% (no management rollover in this example)

LBO Model Structure in Excel (Template Layout)

A clean LBO model should always be built in this order:Before building an LBO, you should be confident in Excel-based forecasting structure — this beginner guide helps.

1) Assumptions sheet

• revenue growth %
• margins %
• working capital % of sales
• capex % of sales
• tax rate
• debt terms (rates + amortization + bullet repayments)
• entry multiple + exit multiple

2) Operating projections (Income Statement)

• Revenue
• EBITDA (Revenue × EBITDA margin)
• D&A (Revenue × D&A %)
• EBIT
• Interest expense (linked from debt schedule)
• EBT
• Taxes
• Net income

3) Debt schedule

For each debt tranche:

• opening balance
• repayment / amortization
• closing balance
• interest calculation

4) Cash flow build (without full balance sheet)

• Net income
• add back D&A
• working capital changes (inventory / receivables / payables)
• capex
• debt repayments
• net change in cash
• ending cash

5) Investor returns

• entry equity invested
• exit equity proceeds
• IRR
• cash-on-cash multiple
• sensitivities (data tables)

Step 1: Revenue, EBITDA & Margin Projections

Start with LTM revenue = 200.

Project 3 years forward at 10% growth:

• Year 1 = 200 × (1 + 10%)
• Year 2 = Year 1 × (1 + 10%)
• Year 3 = Year 2 × (1 + 10%)

Then calculate EBITDA using the constant margin:

EBITDA = Revenue × EBITDA margin (25%)

Step 2: D&A, EBIT, and Taxes

• D&A = Revenue × 5%
• EBIT = EBITDA − D&A
• Tax calculation rule:
  • If EBT > 0 → Tax = EBT × 20%
  • Else tax = 0

Step 3: LBO Debt Structure (The Heart of the Model)

This model includes multiple debt tranches:

Term loans (LIBOR + spread)

Interest is based on:

• LIBOR assumed at 2.25%
• spread = 350 bps
• 1 bps = 0.01% → 350 bps = 3.50%So total rate = 2.25% + 3.50% = 5.75%

Second lien loan (Bullet repayment)

• no amortization during 3-year period
• repaid at end (bullet)

PIK loan (Paid-in-kind at 14%)

• fixed interest = 14%
• no cash interest payments
• interest gets added to principal, increasing the debt balance

This one detail (PIK behavior) is one of the most common interview traps.

Step 4: Interest Calculation (LIBOR + spread)

For term loans:

Interest = Beginning Debt Balance × (LIBOR + Spread)

Where:

• LIBOR = 2.25%
• spread = 350 bps = 3.50%
• total = 5.75%

For PIK:

• Interest = Beginning balance × 14%
• added back to debt principal

Step 5: Cash Flow Modeling Logic (No Balance Sheet Required)

Even without a balance sheet, you can still model working capital changes using % of sales.

Inventory change (Asset)

If inventory is 10% of sales:

• Inventory_t = 10% × Sales_t
• Change in inventory = Inventory_last year − Inventory_current year(assets use last year − this year to represent cash impact)

This gives the cash impact of inventory buildup without building a full balance sheet.

Receivables (Asset)

Same logic as inventory.

Payables (Liability)

Reverse logic:

• Change in payables = Payables_current year − Payables_last year

Step 6: Capex + Debt Repayments + Ending Cash

• Capex is % of sales (negative cash outflow)
• Debt repayments = this year debt balance − last year debt balance
• Net change in cash = Operating + Investing + Financing

Then:

• Opening cash starts at 20 million
• Ending cash = Opening cash + Net change

Important assumption from the tutorial:

✅ Cash is NOT used to repay debt during the 3 years

(it stays on the balance as cash, but you still earn interest on cash)

Step 7: Exit Value, Equity Value, and Investor Returns

Since LBO valuation relies heavily on EBITDA multiples and exit value, you should also practice valuation interview questions.

Exit Enterprise Value

Exit EV is based on Year 3 EBITDA:

Exit EV = Year 3 EBITDA × Exit Multiple (8x)

Exit Equity Value

Equity proceeds = Enterprise value − net debt

Equity = EV − Debt + Cash

Since ownership = 100%:

Investor equity proceeds = total equity at exit.

Step 8: Entry Equity Invested (Purchase Price Logic)

Assume entry multiple = 8x on LTM EBITDA:

Entry EV = LTM EBITDA × Entry multiple

Then:

Entry Equity = Entry EV − Debt + Cash

Entry equity is a negative cash flow (investment).

Exit equity is a positive cash flow (proceeds).

Step 9: IRR and Cash-on-Cash Multiple

IRR

Use Excel IRR function on:

• entry equity (negative)
• exit equity (positive)

Cash multiple

Cash multiple = Exit equity / Entry equity

In the tutorial workflow, this is calculated using SUMIF logic to separate positive vs negative cash flows.

Step 10: Sensitivity Tables (The Real “LBO” Part)

Most LBO value comes from sensitivity analysis because PE firms care about:

• What entry multiple can we pay?
• What exit multiple can we achieve?
• What happens if margins improve?
• What if we only sell part stake in an IPO?

Common sensitivity examples:

✅ Margin sensitivity → how exit multiple / return changes if EBITDA margin rises

✅ Entry multiple sensitivity → returns improve if you buy cheaper

✅ Ownership sensitivity → partial exit vs full exit

✅ 2-way table → entry multiple vs exit multiple mapped to IRR / cash multiple

This is why linking your assumptions correctly is non-negotiable.

FAQ’s – Leveraged Buy Out Model

Is an LBO model difficult?

Not if you understand:

• cash flow mechanics
• debt schedules
• entry/exit multiplesLBO difficulty is mostly about structure + logic.

Why do LBO models use EBITDA multiples?

Because EV/EBITDA is a quick proxy for enterprise value, and it’s commonly used in PE transactions.

Do you need a balance sheet in an LBO?

Not always. Many quick LBO models skip full balance sheets and still accurately model cash and debt paydowns using % of sales logic.

Conclusion

A Leveraged Buy out Model is ultimately a cash flow + debt repayment story.

If you understand:

• how debt is structured and priced,
• how working capital consumes cash,
• and how entry/exit multiples drive returns,

…the model becomes straightforward.

Your job is not to build a fancy spreadsheet — your job is to build a model that answers one question:✅ Does this investment generate the return we need?.If you’re preparing for IB/PE interviews, these are the most tested questions across roles.