What is the last step in walking through an LBO model?

The final step in working through an LBO (Leveraged Buyout) model involves calculating the return on equity for the private equity (PE) firm, which provides a critical indicator of the investment's performance. This calculation typically occurs after all necessary inputs and assumptions have been established, and projections have been made, allowing the model to show how increases in the company's value translate into returns for equity holders.

When performing this step, it's important to take into account the initial equity invested, any debt taken on, and the exit value of the investment, which helps in assessing how effectively the PE firm utilized leverage to generate returns. This not only reflects the success of the transaction but also influences the decision-making and strategy for similar investments in the future.

The other steps, such as adjusting the balance sheet for new variables, creating the sources and uses section, and making purchase price assumptions, are vital parts of the overall modeling process but typically precede the final return analysis. They establish the foundation and context necessary for a thorough evaluation of the equity returns.