Which factor significantly affects an LBO model's return?

In a leveraged buyout (LBO) model, the purchase and exit multiples significantly impact the returns because they determine the valuation of the investment at the time of acquisition and the potential selling price when exiting the investment.

When an investor acquires a company, they do so at a specific multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) or other metrics. This purchase multiple sets the initial value of the investment. Later, when the investor seeks to exit (typically through selling the company), the exit multiple – which could be influenced by market conditions, company improvements, or sector trends – will dictate how much they can sell the company for.

Higher purchase and exit multiples generally lead to greater returns if the company has improved operations and profitability in the interim. Conversely, lower multiples can drastically reduce the returns, which highlights the importance of these metrics in modeling and outcome assessment.

While factors like debt repayment periods, operational expenses, and employee turnover rates play roles in a company's financial health, they do not have the same direct and immediate impact on the primary drivers of LBO returns compared to purchase and exit multiples.