LBO implied value
LBOThe highest price a financial sponsor could pay for a business and still hit its required return, used as a valuation floor.
Run an LBO model backwards. Fix the return the sponsor requires, usually a low to mid twenties IRR over about five years, assume a realistic amount of debt and a defensible exit multiple, and solve for the entry price that delivers it.
That answer is not what the business is worth. It is the most a disciplined financial buyer could justify, which makes it a floor rather than a fair value: below it, a sponsor would step in, so a company is unlikely to trade there in a competitive process.
It is the only method in the standard set driven by a required return rather than by observed prices or forecast cash flows. That is why its output moves with credit conditions: cheaper and more plentiful debt raises what a sponsor can pay without anything about the business changing.
On a football field it usually sits at the low end, below precedent transactions, because a sponsor has no operating business to merge the target into and therefore cannot pay for synergies a strategic buyer can.
Worked example
Solve backwards from a 20% IRR over five years, so roughly 2.5x money. The sponsor needs 875 of equity at exit.
Assuming 130 of exit EBITDA at a flat 9.0x gives 1,170 of enterprise value, less 300 of remaining debt, so 870 of equity. That works at an entry price of about 900.
So 900 is the ceiling for a sponsor and therefore a floor for the company, because below it a financial buyer would step in.