Let’s say we’re analyzing how much debt a company can take on, and what the terms of the debt should be. What are reasonable leverage and coverage ratios?
Answer
It’s dependent on the company’s health, industry norms and the leverage and coverage ratios for comparable LBOs.
You would look at some “debt comps” and evaluate them the same way you would in a Comparable Companies or Precedent Transactions analysis.
You can also say that there are basic guidelines like 4-7x EBITDA being typical and you would never lever up to like 50x EBITDA.
Why this matters to bankers
The point of an LBO is to see how a PE firm would look at a company. That means you have to use similar assumptions as they would, right?