LBO Returns Sandbox

Method

An LBO return is the equity value realized at exit relative to the sponsor equity invested at entry. This sandbox keeps the model intentionally transparent: purchase price comes from entry EBITDA and multiple, debt is set from leverage, EBITDA compounds across the hold, and a defined share of EBITDA pays down debt.

The model calculates enterprise value at entry and exit, then subtracts debt to arrive at sponsor equity. MOIC measures total equity value divided by invested equity. IRR annualizes that return across the holding period. It is useful for comparing opportunities with different hold periods, but it should never be read without checking the sources of value creation.

1. 1. Set entry assumptions

   Convert entry EBITDA and the purchase multiple into enterprise value, then size debt from leverage.

2. 2. Project operations

   Compound EBITDA through the holding period and apply the selected sweep rate to debt.

3. 3. Calculate exit equity

   Apply the exit multiple to exit EBITDA and subtract remaining debt.

4. 4. Stress the return

   Read the entry and exit multiple sensitivity grid before relying on the base case.

A disciplined LBO underwriting process starts with the entry valuation because every turn paid up front must be recovered through growth, deleveraging, or a better exit multiple. EBITDA growth is usually the clearest operating lever, but debt paydown can be equally important when cash conversion is strong. Multiple expansion can raise returns quickly, yet it is also the least controllable assumption. Use the sensitivity table to test whether returns remain credible when the exit multiple moves down or the entry multiple moves up. This free calculator simplifies taxes, interest expense, fees, working capital, capex, and debt tranches. It is an educational first pass rather than a complete investment committee model. For a real deal, build a full cash flow model and validate the operating case, financing terms, and downside liquidity.

Related

• Paper LBO Challenge
• Value Bridge Builder
• Carry Waterfall Visualizer