Case 89 / 183 Analyst

Tech Buyout vs. Industrials Buyout

LBO & Private Equity

The prompt

“As a private equity associate evaluating two potential buyout targets — a mature industrial manufacturer and a high-growth software company — walk me through how the investment thesis, due diligence priorities, capital structure, and exit strategy would differ between the two deals, and show me how a similar entry enterprise value can produce a similar IRR through completely different value creation levers.”

📋 What you're given

As a private equity associate evaluating two potential buyout targets — a mature industrial manufacturer and a high-growth software company — walk me through how the investment thesis, due diligence priorities, capital structure, and exit strategy would differ between the two deals, and show me how a similar entry enterprise value can produce a similar IRR through completely different value creation levers.

1. Task Overview

Task: compare how the investment thesis, leverage, and exit assumptions differ between an industrials buyout and a tech buyout, then demonstrate that a similar entry enterprise value can produce a similar sponsor IRR through very different value creation levers using the figures below.

Step 1: Given Data — IndustrialCo vs. TechCo

Both companies are potential buyout targets the sponsor is evaluating side by side.

MetricIndustrialCoTechCo
LTM EBITDA$37.5m$20.0m
Entry EV/EBITDA Multiple8.0x15.0x
Max Leverage (x EBITDA)5.5x4.0x
Assumed Annual EBITDA Growth4% (0.04)20% (0.20)
Hold Period5 years5 years
FCF Allocated to Debt Paydown (% of Entry Debt)50% (0.50)25% (0.25)
Exit EV/EBITDA Multiple8.0x13.0x

Step 2: Entry Enterprise Value and Capital Structure

Show Entry Structure Formulas

EV = LTM EBITDA × Entry Multiple
Debt = LTM EBITDA × Leverage Multiple
Sponsor Equity = EV − Debt

Using these formulas, compute entry EV, debt, and sponsor equity for both companies.

Step 3: Exit EBITDA

Show Exit EBITDA Formula

Exit EBITDA = LTM EBITDA × (1 + Annual EBITDA Growth)^Hold Period

Using this formula, compute exit-year EBITDA for both companies.

Step 4: Exit Enterprise Value and Exit Equity

Show Exit Value Formulas

Exit EV = Exit EBITDA × Exit Multiple
Remaining Debt = Entry Debt × (1 − Debt Paydown %)
Exit Equity = Exit EV − Remaining Debt

Using these formulas, compute exit EV, remaining debt, and exit equity for both companies.

Step 5: MoM and IRR

Show Returns Formulas

MoM = Exit Equity / Sponsor Equity
IRR ≈ MoM^(1 / Hold Period) − 1

Using these formulas, compute the money multiple and approximate IRR for both companies, then compare which lever drove each result.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

⚠️ Common mistakes

  • Assuming higher leverage always produces a better return — ignoring that debt capacity is set by cash flow stability and collateral quality, not just the EBITDA multiple itself.
  • Applying the same exit multiple assumption to both deal types — a growth-priced entry multiple typically compresses somewhat by exit, while a stable, mature business tends to see little re-rating in either direction.
  • Treating due diligence as one fixed checklist regardless of deal type, instead of shifting the priority workstream (commercial DD for growth stories, financial/operational DD for stable, asset-heavy businesses).
  • Confusing "similar IRR" with "similar risk" — a leverage-driven return and a growth-driven return carry very different sensitivities to a downside scenario.
  • Forgetting that debt is sized off LTM EBITDA times a leverage multiple, not off enterprise value — a common error when the entry multiples differ this much between two targets.

🔁 Follow-up questions

➡️ Related cases

Previous Case 88: SaaS / Recurring Revenue LBO

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