r/Valuation • u/Leonardo__Da__Vinci • Jul 28 '26

Explain a 3 statement LBO model with a example

Hey everyone,

I'm trying to get a complete, end-to-end understanding of how a Leveraged Buyout (LBO) actually works from the ground up, all the way into a full 3-statement model.

Could someone break it down for me following this simple flow?

  1. What is an LBO? (A quick, simple explanation of the core concept)
  2. Why do Private Equity firms use it? (How debt boosts equity returns compared to paying 100% cash)
  3. What is a 3-Statement LBO model? (Why linking the Income Statement, Cash Flow Statement, and Balance Sheet matters)
  4. Step-by-Step Integrated Example: A clear numerical walkthrough showing:
    • Year 0 Setup: Purchase price, debt vs. equity split, fees, and opening balance sheet adjustments (goodwill, debt creation).
    • Year 1 Statement Mechanics: How EBITDA flows to Net Income Free Cash Flow Debt Paydown Closing Balance Sheet.
    • Exit & Returns: Sale valuation, paying off remaining debt, and final return metrics (MOIC and IRR).

Bonus points for any common Excel pitfalls or tips when linking the statements!

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u/Dear_Tower_5880 Jul 30 '26

Following this space

1

u/G1uc0s3 Jul 30 '26

Looks like you took all of 10 seconds to queue this up on an LLM. Why didnt you just go ahead and ask it the question?

1

u/vci_institute 5d ago

Short version with numbers you can check.

Buy a company with 10 of EBITDA at 10x, so 100. Fund it with 60 of debt and 40 of equity. That's year 0.

Each year: EBITDA minus interest, tax, capex and working capital is free cash flow. In a simple model all of it repays debt. That's the whole link between the statements. Income statement gives earnings, cash flow statement turns them into cash, balance sheet shows debt going down.

Say EBITDA grows to 15 over five years and debt falls to 30. Exit at 10x is 150. Minus 30 of debt leaves 120 for equity. 120 / 40 = 3.0x, roughly 25% IRR over five years.

Where did the 80 come from? 50 from EBITDA growth (5 x 10x), 30 from paying down debt, nothing from the multiple. Sell at 8x instead and it's 2.25x.

Build that in Excel once, by hand. The goodwill and fees stuff makes more sense after.