An LBO model ends at the sponsor's return. At exit:
- Exit enterprise value = exit-year EBITDA x exit multiple.
- Exit equity value = exit enterprise value - net debt (debt minus cash) at exit.
- MOIC, the multiple of invested capital = exit equity / equity invested. Also called multiple of money.
- IRR turns that multiple into an annual rate. With one cash flow in and one out, IRR = MOIC^(1/years) - 1. With cash in between, such as a dividend, lay out the sponsor's cash flows by year and use
=IRR(...), as you did for projects.
MOIC says how much money came back; IRR says how fast. IRR has a known limitation: getting money back earlier, through a dividend recap for example, raises it even when MOIC stays the same.
Returns come from three places: EBITDA growth, paying down debt, and selling at a higher multiple than you paid. Sponsors look at how sensitive IRR is to the exit multiple, because it's the least certain of the three.