How do you determine how much debt a company can take on in an LBO?

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IBPrep · Accepted Answer

Key constraints: (1) Debt/EBITDA ratio, typically 5-7x total leverage for healthy businesses, lower for risky industries; (2) Interest coverage, EBITDA / Interest must stay above ~2-3x (covenants are tighter); (3) FCF / Debt, the company must generate enough cash to service the debt; (4) Market appetite, what lenders are actually willing to provide; (5) Equity cushion, sponsors typically want 30-40% equity to keep the investment risk-reward profile balanced.

How do you determine how much debt a company can take on in an LBO?

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