A Simple LBO Model (Explained Like You’re 15)

A Simple LBO Model (Explained Like You’re 15)

What is an LBO in one sentence?

By: John S. Morlu II, CPA

An LBO (Leveraged Buyout) is when someone buys a company using a lot of borrowed money, then uses the company’s own cash to pay back the debt, hoping to sell the company later for more than they paid. It’s like buying a house with a mortgage — except the house pays the mortgage for you.

Step 1: The Purchase Price

Let’s say:

  • Company value (purchase price): $100 million

Step 2: How the Buyer Pays

The buyer does NOT pay all cash. Instead:

  • Debt (loan): $70 million
  • Equity (buyer’s cash): $30 million

This is leverage. The buyer controls a $100M company with only $30M of their own money.

Step 3: What Happens After the Buyout

Now the company is private. Each year, the company:

  • Makes profit
  • Uses that profit to:
    • Pay interest on debt
    • Pay down the loan
    • Invest a little in the business

Assume:

  • Annual cash flow: $15M
  • Debt paid down over 5 years: from $70M → $30M

Step 4: The Exit (This Is Where Money Is Made)

After 5 years:

  • Company is sold again for $120M (improved business)

What happens to the money?

  • Sale price: $120M
  • Remaining debt: −$30M
  • Cash left for owners: $90M

Remember:

  • Owners invested only $30M

Result:

  • Invest $30M → get back $90M
  • 3× return (before fees)

Why Leverage Matters (Simple Math)

If the buyer used no debt:

  • They’d invest $100M
  • Sell for $120M
  • Make $20M (20% return)

With leverage:

  • They invest $30M
  • Make $60M profit
  • Much higher return

Debt magnifies outcomes — good or bad.

The Danger (Very Important)

If the company’s cash flow drops:

  • Debt still must be paid
  • Miss payments → default → bankruptcy risk

This is why LBOs punish weak businesses.

Author: John S. Morlu II, CPA is the CEO and Chief Strategist of JS Morlu, leads a globally recognized public accounting and management consultancy firm. Under his visionary leadership, JS Morlu has become a pioneer in developing cutting-edge technologies across B2B, B2C, P2P, and B2G verticals. The firm’s groundbreaking innovations include AI-powered reconciliation software (ReckSoft.com), Uber for handymen (Fixaars.com) and advanced cloud accounting solutions (FinovatePro.com), setting new industry standards for efficiency, accuracy, and technological excellence.

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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