LBO model glossary

A transaction where a buyer uses meaningful debt alongside sponsor equity. The model forecasts operating cash flow, debt service, and an exit so you can judge whether equity returns meet the fund’s hurdle.

The closing bridge: sources include equity, senior debt, subordinated debt, and rollover; uses include purchase price, fees, refinancing, and cash to the balance sheet. Every dollar in must equal every dollar out.

In many models, purchase price is framed as EV. Equity value at exit is typically EV minus net debt (and sometimes other claims) unless you model explicit waterfall mechanics.

The controlled inputs reviewers care about—usually on a dedicated tab. Changes here should propagate through the income statement, cash flow, debt schedules, and returns without hidden hard-codes.

Revolver, term loan A/B, or unitranche tranches that sit ahead of subordinated lenders. In sweep logic, available cash usually pays senior balances before junior tranches.

Mezzanine, second-lien, or vendor notes that absorb more risk. Models often sweep senior debt fully before meaningful paydown of sub debt.

After interest, capex, taxes, and minimum cash, remaining cash “sweeps” to pay down tranches (senior-first in most LBOs). Sweeps reduce leverage ahead of exit and change equity returns.

Common in early model years when cash is tight. Principal reduction may be deferred until sweeps or mandatory amortization kick in.

A covenant-style floor or operational buffer. Sweep engines cap principal paydown so ending cash does not fall below this balance.

Typically EBITDA (or another cash proxy) over interest plus scheduled principal. Lenders watch headroom; models flag breaches when ratios fall below thresholds.

Modeled as ratio tests by period. Breaches may be informational in a base case but matter for lender materials and downside scenarios.

Equity IRR reflects timing: equity invested at close (negative), optional interim distributions, and proceeds at exit (positive). In Excel, XIRR is common when dates are irregular.

A simple “cash-on-cash” multiple: exit equity proceeds over equity in. MOIC complements IRR—high MOIC with low IRR often means capital was tied up longer.

A key sensitivity lever. Small changes in exit multiple can move IRR and MOIC materially because equity is a residual claim after debt.

Defines preferred returns, catch-up, and promote splits. Waterfall charts show who receives what as exit value rises through hurdles.

Distinct from an equity promote waterfall: this is the operating cash bridge—EBITDA to free cash flow to sweep/paydown to optional dividends or build-up of exit proceeds.

Shows up in sources as quasi-equity and in the exit waterfall as a separate equity class. Aligns management with sponsor outcomes at exit.

Flex scenarios let you compare cases without rebuilding the workbook. Each case should use the same structure with different drivers (growth, margin, leverage, exit).

Common tables vary exit multiple and EBITDA margin, or leverage and rates, to show IRR/MOIC or covenant headroom. Helps lender and deal team conversations.

Excel can iterate to solve these; auditors flag unstable circles or missing iteration settings. Clean LBO models document and test circularity.

Workhorse for rolling P&L lines, debt balances, and cash flow buildup. SUMIFS keeps scenario tabs isolated when each case has its own column block.

Used for toggles (scenario flags), covenant pass/fail, and period logic (e.g. pre- vs post-sweep). Keep logic readable—deep nesting is hard to audit.

Typical pattern: principal paydown = MIN(remaining balance, cash available for sweep). MAX supports minimum cash and non-negative balances.

OFFSET shifts across a timeline; INDEX/MATCH (or XLOOKUP) pulls assumptions by label. Auditors check that references do not drift when rows are inserted.

Less common than IRR for sponsor returns but useful for debt or asset NPV checks. Rate must match the periodicity of the cash flows.

Equity returns tabs often use XIRR on dated equity contributions and exit proceeds. Ensure the initial equity draw is negative and exit inflow is positive.

Useful for fixed-amortization tranches. Many LBOs use custom sweep schedules instead of PMT, but revolvers and amortizing term loans may still use these.

Upload Excel and receive flagged issues tied to cells—useful before deal team review and lender materials. Complements manual review, not a substitute for judgement.

The bridge between your spreadsheet and deterministic cashflow runs—operating cash flows, tranches, sweep rules, and exit assumptions.

The core output table for memos and charts. Should reconcile to your Excel logic when drivers are aligned.

Supports repeatability when assumptions change between deal team and lender drafts.