There are five steps involved in creating an LBO model.
The first step involves creating assumptions on the Purchase Price, Debt/Equity Ratio, Interest Rate on Debt, and other variables. Depending on the amount of information you have, you may also make assumptions regarding the business's activities, such as Revenue Growth or Margins.
The second step is to construct the Sources & Uses section that outlines your funding sources.
This also reveals how much the investor paid for the deal and what you did with the money and how much investor equity is necessary.
In order to balance everything, step three involves updating the company's balance sheet to reflect the new debt and equity amounts as well as adding goodwill and other intangibles to the assets side.
The fourth step entails projecting the income statement, balance sheet, and cash flow statement of the business in order to calculate the amount of debt that will be repaid annually based on the available cash flow and the necessary interest payments.
The fifth step involves making assumptions about the departure after a number of years—typically, an EBITDA Exit Multiple—and calculating the return based on how much equity is given to the company.