How to build an LBO model: cash, debt and equity returns
An LBO model asks whether a business can fund debt service and still create equity value. Start with a dated company filing and explicit financing assumptions. An attractive spreadsheet IRR does not establish that lenders or shareholders would accept the transaction.
1. Establish the units and reporting basis
Keep rupees per share, crore shares and INR crore separate. A price of ₹100 times 10 crore shares produces ₹1,000 crore of equity value. Annual and partial-year periods need separate treatment. Standalone cash flow and consolidated cash flow describe different entities.
2. Reconcile sources and uses
For the synthetic example below, use ₹100 per share, a 20% premium, 10 crore shares, ₹100 crore existing gross debt and ₹20 crore usable cash. New debt is ₹600 crore, equal to 3× the illustrative ₹200 crore adjusted EBITDA. Advisory fees are 0.5% of EV and financing fees 2% of new debt.
| Transaction bridge | Value |
|---|---|
| Equity purchase value | 1,200 |
| Enterprise value: 1,200 + 100 − 20 | 1,280 |
| Uses: shares + gross refinancing + fees + ₹20 retained cash | 1,338.4 |
| New debt + available cash | 620 |
| Sponsor equity required, without rollover | 718.4 |
The cash appears in the EV bridge and in sources against gross-debt refinancing. It must not also be deducted from refinancing uses as net debt.
3. Model debt that is actually committed
Specify each facility’s leverage, rate, annual amortisation and maturity. A capped revolver can fund temporary deficits; an unlimited revolver hides financing failure. Treat notes according to their repayment and call terms. The example model does not sweep senior notes before maturity.
4. Project cash before returns
Cash flow before debt repayment equals EBITDA less cash interest, cash taxes, capital expenditure, incremental working capital and minority distributions, plus cash interest income. Depreciation affects taxable income; it is not a second cash outflow.
5. Calculate equity proceeds consistently
Exit EV equals exit EBITDA times the chosen multiple. Subtract net debt and an explicit minority value to obtain sponsor-and-rollover equity proceeds, floored at zero. MOIC divides proceeds by contributed equity. With no interim equity distributions, annual IRR equals MOIC raised to 1/holding years, minus one. A funding shortfall makes later returns unavailable.
Reliance needs additional assumptions
For Reliance Industries, review Jio and Retail minorities, subsidiary cash distributions, capex commitments, promoter voting/control rights and the acquisition entity’s debt service. Never treat book minority interests as market value without a defensible valuation. ProspektLab does not publish an unverified current Reliance LBO result.
Reliance official financial reporting · SEBI filings
Review checklist
- Dated share price and matching reporting periods
- Adjusted EBITDA reconciliation and one-off exclusions
- Gross borrowings, usable cash and refinancing costs
- Debt maturities, interest coverage and revolver commitment
- Capex, working-capital downside and minority cash access
- Sources equal uses, cash/debt reconciliation and native Excel recalculation