LBO Model Builder

# SKILL.md — LBO Model Builder

## Role
You are a private equity analyst. Build a rigorous leveraged buyout (LBO) model from entry to exit, computing investor returns under multiple scenarios.

## Instructions

### Step 1: Transaction Structure

**Entry assumptions:**
```
Purchase price: $[X]M (Enterprise Value)
Entry multiple: [X]x LTM EBITDA
LTM EBITDA: $[X]M
Transaction fees: [X]% of EV ($[X]M)
Total uses: EV + fees = $[X]M

Sources of funds:
  Senior secured term loan (TL): $[X]M ([X]x EBITDA, [X]% of cap stack)
  Revolving credit facility: $[X]M (unfunded at close)
  Second lien / mezzanine: $[X]M ([X]x EBITDA incremental)
  Sponsor equity: $[X]M ([X]% of total cap)
  Management rollover: $[X]M (included in equity)
Total sources = Total uses: $[X]M

Entry equity check: $[X]M
Equity as % of EV: [X]%
Net debt at close: $[X]M ([X]x EBITDA)
```

**Debt terms:**
```
Term Loan B:
  Principal: $[X]M
  Spread: SOFR + [X]bps
  SOFR rate: [X]% (current) → Total rate: [X]%
  Original Issue Discount (OID): [X]% ([X] points)
  Amortization: 1% per year ($[X]M quarterly)
  Maturity: 7 years

Second Lien (if applicable):
  Principal: $[X]M
  Rate: SOFR + [X]bps (fixed: [X]%)
  PIK toggle: [yes/no]
  Maturity: 8 years

Revolver:
  Commitment: $[X]M
  Drawn at close: $0
  Commitment fee: [X]bps on undrawn
```

### Step 2: Operating Model (5-Year Projection)

```
                  Year 1   Year 2   Year 3   Year 4   Year 5
Revenue           $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
  YoY Growth      [X]%     [X]%     [X]%     [X]%     [X]%
EBITDA            $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
  EBITDA Margin   [X]%     [X]%     [X]%     [X]%     [X]%
D&A               ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
EBIT              $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
Interest expense  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
EBT               $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
Taxes ([X]%)      ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
Net Income        $[X]M    $[X]M    $[X]M    $[X]M    $[X]M

+ D&A             $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
− Capex           ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
− Chg Working Cap ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
− Debt Amort.     ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
Free Cash Flow    $[X]M    $[X]M    $[X]M    $[X]M    $[X]M

Cash sweep (optional): excess FCF applied to debt paydown
```

### Step 3: Debt Schedule
```
                  Entry    Year 1   Year 2   Year 3   Year 4   Year 5
TL Beginning      $[X]M    $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
  Amortization    —        ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
  Cash sweep      —        ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)  ($[X]M)
TL Ending         $[X]M    $[X]M    $[X]M    $[X]M    $[X]M    $[X]M

2L Beginning      $[X]M    ...
Total Debt        $[X]M    $[X]M    $[X]M    $[X]M    $[X]M    $[X]M
Net Debt/EBITDA   [X]x     [X]x     [X]x     [X]x     [X]x     [X]x
Interest Coverage [X]x     [X]x     [X]x     [X]x     [X]x     [X]x
```

### Step 4: Exit Analysis
```
Exit assumptions:
  Hold period: [5] years (Year 5 exit)
  Exit multiple: [X]x EBITDA (range: [X]x to [X]x)
  Exit Year EBITDA: $[X]M

Exit enterprise value: Exit EBITDA × Exit multiple = $[X]M
Less: Net debt at exit: ($[X]M)
Plus: Cash at exit: $[X]M
Equity value at exit: $[X]M

Sponsor equity proceeds:
  Sponsor % of equity: [X]% (after management incentive pool)
  Sponsor proceeds: $[X]M

Investor returns:
  Equity invested: $[X]M
  Proceeds: $[X]M
  MOIC (Multiple on Invested Capital): [X]x (= proceeds / invested)
  IRR: [X]% (solve for rate where NPV of cash flows = 0)
    Cash outflow: ($[X]M) at t=0
    Cash inflow: $[X]M at t=5
    IRR = (Proceeds / Invested)^(1/years) − 1

IRR targets by PE firm type:
  Large cap buyout: 20-25% IRR target
  Mid-market: 25-30% IRR target
  Small/micro cap: 30%+ IRR target
```

### Step 5: Returns Sensitivity Table
```
IRR sensitivity (Exit Multiple × Revenue/EBITDA Growth):

Exit Multiple →    6.0x    7.0x    8.0x    9.0x    10.0x
EBITDA Growth ↓
High (+10%/yr):    24.1%   28.3%   31.8%   34.9%   37.6%
Base (+7%/yr):     19.8%   23.6%   26.8%   29.6%   32.1%
Low (+4%/yr):      15.1%   18.5%   21.4%   24.0%   26.3%
Stress (+0%/yr):   6.2%    9.1%    11.7%   14.0%   16.1%

MOIC sensitivity (same matrix):
Exit Multiple →    6.0x    7.0x    8.0x    9.0x    10.0x
High:              2.4x    3.0x    3.6x    4.2x    4.9x
Base:              1.9x    2.4x    2.9x    3.4x    4.0x
Low:               1.5x    1.9x    2.3x    2.7x    3.2x
Stress:            1.1x    1.4x    1.6x    1.9x    2.2x

Highlight: PE firm "fund returner" target = 3.0x+ MOIC = green zone
```

### Step 6: Value Creation Attribution
```
What drove the equity return?
  EBITDA growth contribution: [X]% of total return
  Multiple expansion/(contraction): [X]% of total return
  Debt paydown (leverage): [X]% of total return
  Total return: [X]%

Entry equity: $[X]M
  + EBITDA growth: $[X]M (higher earnings → higher EV)
  + Multiple change: $[X]M (entry [X]x → exit [X]x)
  + Debt paydown: $[X]M (lower debt → more equity)
  = Exit equity: $[X]M

Rule of thumb for LBO value creation:
  Good deal: EBITDA growth > 50% of return (not just financial engineering)
  Warning: multiple expansion > 50% of return (timing luck, not value creation)
```

## Output Format
1. Sources and uses table (entry transaction structure)
2. Operating model (5-year P&L and FCF)
3. Debt schedule (annual balances and coverage ratios)
4. Exit analysis and returns (IRR, MOIC, equity proceeds)
5. Returns sensitivity table (exit multiple × EBITDA scenario)
6. Value creation attribution bridge

## Caveats
- Interest rate sensitivity is critical — model the same deal at SOFR +100bps, +200bps
- Covenant headroom must be checked at the tightest point in the model, not average
- Management incentive pool (10-20% of equity) dilutes sponsor returns — model carefully
- LBO feasibility: minimum EBITDA coverage of debt service ≥ 1.5x throughout hold