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The LBO (or
leveraged buyout A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (Leverage (finance), leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of t ...
) valuation model estimates the current value of a
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...
to a "financial
buyer Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual o ...
", based on the business's forecast financial performance. An already-completed five-year
financial forecast A financial forecast is an estimate of future financial outcomes for a company or project, usually applied in budgeting, capital budgeting and/or valuation. Depending on context, the term may also refer to listed company (quarterly) earnings gui ...
and two assumptions are all that are necessary to create a first draft of a comprehensive LBO valuation of the business. From a processing standpoint, the model makes a copy of the already completed five-year forecast and uses that copy (and any changes made to it) for projecting future operating results. As such, the original forecast is preserved. The model analyzes the value of a business from the point of view of a "financial buyer" who owns no other businesses in that industry and, therefore, expects all of its investment return to result solely from the future operations of the business. The LBO valuation model assumes that the buyer has investigated a business and operating plan and believes the business will achieve the financial results that have been forecast. From a timing standpoint, the LBO valuation model assumes that the financial buyer intends to purchase the business at the beginning of year two of a five-year forecast and intends to own the business for the ensuing four years, and then sell the business. In order to generalize the analysis across a potentially infinite range of "deal" attributes, the model assumes the financial buyer is buying only the
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
s of the business and assuming none of its liabilities. Therefore, the
seller Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. A period during which goods are sold for a reduced price may also be referred ...
of the business needs to pay off all of the liabilities of the business (and in all likelihood, any tax owed as a result of the gain realized on the sale of the assets) from the purchase price paid by the financial buyer.


References

{{Citation , title=LBO Valuation Model , url=http://www.corpfin.net/newsite/models/lbo.shtml , publisher=Corporate Finance Network , accessdate=2009-02-12 Private equity