Explain why an LBO ability-to-pay analysis typically forms the floor of a football field. What two constraints cap the sponsor's price?
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The answer
An LBO ability-to-pay analysis forms the floor because a financial sponsor has no synergies and must clear roughly a 20 percent IRR. That requirement and the available debt impose two binding constraints that cap the price. The first is leverage capacity: the maximum debt the financing markets will provide against the target's cash flows directly limits the enterprise value the sponsor can pay.
The second is the return hurdle itself: even with ample debt, the sponsor must buy at a low enough entry multiple so that projected cash flows and a realistic exit generate a 20 percent IRR.
A strategic acquirer faces neither of these hard caps, and because it can capture synergies it can justify paying a control premium a sponsor cannot, so the sponsor's price usually sits below what trading comps, precedents, or a DCF would support, making it the floor of the football field.
Sources & uses
| Term Loan B | 400 |
| Senior notes | 250 |
| Sponsor equity | 370 |
| Total sources | 1,020 |
| Purchase of equity | 900 |
| Refinance existing debt | 100 |
| Financing & advisory fees | 20 |
| Total uses | 1,020 |
Also asked as
- Why do bankers present valuation as a football field of ranges rather than a single number? What does each of the standard bars contribute?
- Which two variables would you sensitize in a DCF using Gordon growth terminal value, and why those two specifically?
- Why do precedent transaction bars usually sit above trading comps bars on a football field? Give both economic reasons.
- Your DCF sensitivity grid includes a cell with WACC of 6.5% and terminal growth of 6.5%. What does that cell produce mathematically, and why is it economically meaningless?
- Terminal-year FCF is $90mm, WACC is 10%, terminal growth is 2%. Terminal-year EBITDA is $140mm. Compute the terminal value and the implied exit multiple, and state whether it is defensible if comps trade at 8x–9x.
- A company's 52-week range is $30–45, comps imply $38–46, precedents imply $50–58, the DCF gives $42–56, and an LBO supports up to $48. The board asks whether to accept an all-cash bid at $52. Using the field, structure your recommendation and identify what additional work you would show.
- Net debt is $400mm and diluted shares are 60mm. Trading comps of 9.0x–10.5x apply to forward EBITDA of $180mm. Compute the implied per-share range, then recompute if you discover $50mm of the 'cash' netted in net debt is trapped overseas and should be excluded. Quantify the per-share impact.
- A sponsor exits in year 5 at 9.0x EBITDA of $260mm with $700mm of net debt remaining at exit, and requires a 2.5x MoIC. Lenders will fund entry leverage of 5.5x on entry EBITDA of $200mm. Solve for the maximum enterprise value the sponsor can pay today and express it as an entry multiple. Show all steps.
- Your Gordon growth terminal value (WACC 8.5%, g 3.0%) implies a year-5 exit multiple of 14x EBITDA while comps trade at 10x today. The MD asks you to defend or fix the model in front of the client tomorrow. Walk through the full reconciliation: what is inconsistent, the two levers you could move, the cross-check math you would run after each change, and how you would present the corrected sensitivity range.
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