LBO Modeling Assessment

Assignment Overview

Instructions:

• You have 90 minutes to complete the short-form LBO modeling assessment
• No other outputs other than the Excel are required; feel free to add additional rows to your Excel sheet for any supporting calculations
• Please upload your file to your individual Box folder before time has elapsed
• During the exercise, you are not to access any other files on your computer or the network; this is a closed-book exercise
• Suggested workflow:
  • Read through assumptions and notes below
  • Review template and identify gaps requiring completion
  • Complete the model
• No incremental bells & whistles are required; model only needs to handle the assumptions below and those in the model

Assumptions and Notes:

• Assume the deal closed on 12/31/2022 ® no stub period
• 2022A EBITDA for all leverage and entry valuation calculations; 10x purchase price
• Total Leverage is 6.0x ® Revolver is undrawn at close, First Lien Term Loan of 3.5x, and Mezzanine PIK Notes of 2.5x
• Sweep all excess cash to the First Lien Term Loan down to $10M of Minimum Cash
• Mezzanine PIK Notes cannot be prepaid during the investment period and PIK Interest should be calculated on the beginning balance only, not average
• Please ignore the limitations on interest deductibility as well as the benefits from bonus depreciation under the 2017 Tax Cuts and Jobs Act
• Amortize Financing Fees over the life of each piece of debt and include as part of Interest Expense; assume the Revolver fee is paid on the Revolver Facility of $150M since it is undrawn at close
• Management options share in 10% of the profit created for equity holders; if there is no profit, management receives no proceeds at exit
• Complete the sensitivity tables for an exit at the end of 2027; for the Entry Leverage sensitivities, leave First Lien Leverage at 3.5x and flex the amount funded via Mezzanine PIK Notes

Assessment Requirements – Brief Summary

The LBO (Leveraged Buyout) Modeling Assessment required students to complete a short-form LBO model within 90 minutes under closed-book conditions. Key requirements included:

• Use 2022A EBITDA as the basis for leverage and entry valuation.

• Apply a 10x purchase price multiple with 6.0x total leverage (3.5x First Lien Term Loan, 2.5x Mezzanine PIK Notes, undrawn Revolver).

• Ensure cash sweep mechanics toward First Lien down to $10M minimum cash.

• Apply PIK interest only on the beginning balance of mezzanine notes.

• Include financing fee amortization in interest expense.

• Allocate 10% of equity profits to management options.

• Complete sensitivity tables for exit scenarios at the end of 2027, flexing Mezzanine PIK Notes while holding First Lien at 3.5x.

• No extra features were needed beyond assumptions provided.

Step-by-Step Approach by the Academic Mentor

While guiding the student, the mentor ensured that the entire exercise was approached systematically:

1. Understanding the Assumptions & Structure
   The mentor began by reviewing all assumptions with the student, clarifying leverage structure, entry multiple, financing fees, and cash sweep rules. This ensured the student fully understood the deal mechanics before starting.

2. Template Review & Identifying Gaps
   The student was guided to check the model template carefully, marking the missing calculations and placeholders. The mentor emphasized linking all assumptions logically into the Excel framework to avoid inconsistencies.

3. Building the Debt Schedule
   Step-by-step, the student built the First Lien Term Loan and Mezzanine PIK Notes schedules. The mentor highlighted:

   • Proper incorporation of amortization and mandatory sweep rules.

   • PIK interest accrual only on beginning balances.

   • Correct fee amortization into interest expense.

4. Cash Flow Waterfall & Equity Returns
   The mentor explained how excess cash is applied toward debt reduction, then equity recovery. The student modeled exit equity proceeds distribution and calculated management’s 10% profit share.

5. Sensitivity Analysis
   The mentor demonstrated how to flex entry leverage by adjusting PIK funding, while holding First Lien fixed at 3.5x. The student completed sensitivity tables for exit multiples at 2027, presenting equity returns under multiple scenarios.

6. Validation & Checks
   Finally, the mentor guided the student to test the model’s flow, ensuring no circularity errors, correct debt balances at maturity, and consistency across outputs.

Outcome & Learning Objectives Covered

The final model successfully incorporated all assumptions and produced clear outputs, including exit sensitivities. The student gained confidence in:

• Structuring an LBO model under time constraints.

• Building robust debt schedules with cash sweep mechanics.

• Applying PIK interest correctly.

• Distributing exit proceeds and modeling management incentives.

• Conducting sensitivity analyses for leverage and exit multiples.

Overall, the exercise helped the student strengthen technical modeling skills, logical structuring, and efficiency in Excel-based financial analysis.

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