§ 01
PG — Operating Margin, Debt/Equity, Revenue Growth. Open PG on the Ledge to see current values.
§ 02
| Criteria | Why It Matters | Red Flag |
|---|---|---|
| Stable, predictable cash flows | Must service debt through cycles | Cyclical revenue, project-based |
| Low capex requirements | More FCF available for debt paydown | Heavy annual capex obligations |
| Strong market position | Pricing power protects margins under leverage | Commoditized, price-taking |
| Operational improvement potential | Margin expansion drives returns | Already best-in-class margins |
| Tangible assets | Collateral for secured debt | Asset-light, IP-dependent |
| Experienced management | Can execute under pressure of debt | Founder-dependent, thin team |
§ 03
Cash flow stability is the #1 criterion. A cyclical business with 50% EBITDA drops during downturns cannot service 5–6x leverage. Recession-resistant businesses (healthcare, defense, consumer staples, business services) are the classic LBO targets.
§ 04
Look at a company in **Fundamentals**. Would it survive an LBO? Check: How stable are cash flows? How much capex is required? Is there margin improvement opportunity?
§ 05
A software company with 90% recurring revenue, 30% EBITDA margins, and minimal capex vs. a construction company with project-based revenue and 10% margins. Which is a better LBO candidate?
§ 06
§ 07
What business traits make the BEST LBO target?
Five questions · AI feedback
Sit with the ideas.
Two companies are being evaluated as LBO targets. Company P: $80M EBITDA, 30% EBITDA margin, 3% capex/revenue, 5% annual revenue growth, recurring revenue model. Company Q: $120M EBITDA, 25% EBITDA margin, 12% capex/revenue, 15% annual revenue growth, project-based contracts. Which is the better LBO candidate and why?
Why: