A live company's EV/EBITDA and leverage
The three drivers of LBO returns
| Return Driver | Mechanism | Typical Contribution |
|---|---|---|
| EBITDA growth | Revenue growth + margin improvement | 30–50% of returns |
| Multiple expansion | Buy at 8x, sell at 10x | 20–30% of returns |
| Debt paydown | FCF used to reduce debt, increasing equity value | 20–40% of returns |
Exit equity value and MOIC
Equity Value at Exit = Exit EV − Remaining Debt
How debt paydown alone builds equity value
The magic of LBOs is that the company’s own cash flows pay down the acquisition debt, shifting the enterprise-value mix from debt claims to the equity residual. The lenders lose nothing — they are repaid at par plus interest; the equity’s gain comes from the business’s own cash generation accruing to a thin equity slice. Even without any growth or multiple expansion, debt paydown alone creates equity returns.
Reverse-engineer a real PE deal's MOIC
Computing MOIC step by step
Which return lever is most reliable
Estimating a deal's equity IRR
Going deeper: the IRR decomposition drill
Going deeper (optional). Up next: a deeper look at how this plays out in practice — an advanced aside you can skip on first pass and come back to anytime. Continue when you're curious.
Going Deeper — this module includes a detailed LBO IRR return-decomposition drill. It is promoted to its own module: see 'LBO Return Decomposition: IRR Drill' (corpval-6b) in this path.
Sources and uses of funds
| Uses of Funds | Uses ($M) | Sources of Funds | Sources ($M) |
|---|---|---|---|
| Equity purchase price | $850M | New term debt | $600M |
| Refinance existing debt | $150M | Rollover equity | $50M |
| Transaction fees (advisory, legal) | $25M | Sponsor equity | $400M |
| Financing fees / OID | $15M | — | — |
| Minimum cash to balance sheet | $10M | — | — |
| Total uses | $1,050M | Total sources | $1,050M |
How deal costs fit the sources and uses
Where the money actually goes: the sources and uses table above is the full version of this module's deal. The headline framing — a $1,000M purchase at 10x $100M EBITDA, funded with $600M of debt and $400M of sponsor equity — nets out the deal costs. The full table adds them back: the $1,000M enterprise value splits into $850M paid to selling shareholders and $150M of existing debt refinanced at close, and the buyer must also fund $25M of transaction fees, $15M of financing fees and original-issue discount, and $10M of minimum operating cash. Both columns tie exactly: $850M + $150M + $25M + $15M + $10M = $1,050M of uses, funded by $600M + $50M + $400M = $1,050M of sources, with management rolling $50M of equity alongside the sponsor's $400M check. Fees are real uses that don't buy anything — they raise the check size without raising the asset value, which is why they drag day-one returns. At exit, the same logic runs in reverse: exit enterprise value converts to equity proceeds through the same EV-to-equity bridge taught in 'The DCF Framework: From Theory to Model', the first module of the DCF path.
Sit with the ideas.
A PE firm acquires a company for $1B (10x $100M EBITDA). The deal is financed with $600M debt (6x EBITDA) and $400M equity. Over 5 years, the company generates $50M/year in free cash flow after interest, all used to repay debt. EBITDA stays flat and the exit multiple stays at 10x. What is the equity return?
Find a takeover candidate after the LBO lesson
Apply the basic LBO screen: stable cash flows, low leverage, fragmented industry, public-to-private feasible. Paper-buy 10 shares of a candidate and write the deal thesis a PE firm might be reading right now.
Open paper portfolio →Practice mode — simulated trades, not investment advice.