[financetechbro]

For a leveraged buy out, the most important thing are the cash flows. So if a business has enough $ to service the loan there should be no problem.

Also good to remember that the business model of PE firms is to buy a leveraged asset, hold for 5 ish years, resale asset at a higher price than it was bought from. Ofc easier said than done, but these investors don’t get involved to lose money purpose

[airstrike]

in tech, the LBO model is about selling at a higher revenue multiple than you bought it for, cashflows be damned.

traditional LBOs are not done on revenue multiples

[financetechbro]

ALL LBO models are about selling the asset for a higher multiple than it was bought for. Not just tech.

Also, CFs are the most important thing for an LBO. The point of this investment model is for an asset to pay for itself, so if it has no cash flows how can it possibly do that. Also cash flows =/= profit here. You can be cash flow positive and not be profitable.

And you are right about LBOs not being done on rev multiples

[airstrike]

I misspoke. Generally speaking, when modeling an LBO you assume entry = exit multiple to be conservative. What I meant to say is that in Tech, if you sell at the same, call it, 10x multiple on Revenue but your annual revenue grew some X% over the period, you can still get to a very compelling IRR even if the actual CF profile of the business hasn't improved at all. Obviously if you sell at a higher multiple that is doubly true.

The point is Tech companies don't strictly need profitability to be considered good LBO candidates, because everything is done at the top line level for the "sexier" very high growth companies.

The asset still "pays for itself" on exit, just not so much during the investment period. In other words, the value to equity holders is not from debt paydown with the assets' cash flows, but with the exit proceeds.