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Private Equity · Topic lesson

Operating Model

How a sponsor grows EBITDA and cash after buying a company: price, volume and mix, operating leverage, cost-out programs, working capital and capex.

5 chapters About 51 minutes0 of 5 complete
Start chapter 1

Buying well gets a deal started; the operating plan decides how it ends. Sponsors are expected to say exactly where more EBITDA and more cash will come from, and interviewers test whether you can put numbers on each lever. This lesson covers the levers in the order a value creation plan usually uses them.

  • Grow revenue. Price, volume and mix, which are not worth the same.
  • Turn it into EBITDA. Fixed costs make EBITDA move faster than revenue: operating leverage.
  • Cut costs. A one-off cost for a permanent saving, valued at the exit multiple.
  • Release cash. Collect faster, hold less stock, pay suppliers later.
  • Reinvest wisely. Maintenance capex keeps the business; growth capex should earn more than it costs at exit.
The rule that solves every question

Ask of every lever: does it change EBITDA, or only cash? EBITDA changes are worth the exit multiple; cash changes are worth their dollars once. Price, volume, cost-out and growth capex move EBITDA; working capital moves only cash.

A value creation plan, lever by lever

From revenue to cash. Each step points to the chapter that practices it.

  1. 1
    Grow revenue

    Split growth into price, volume and mix.

    Chapter 1
  2. 2
    Grow EBITDA faster

    Fixed costs give operating leverage, both ways.

    Chapter 2
  3. 3
    Cut the cost base

    Pay once, save every year, get paid the multiple at exit.

    Chapter 3
  4. 4
    Release cash

    Days of receivables, inventory and payables.

    Chapter 4
  5. 5
    Reinvest

    Maintenance is a cost; growth capex must beat 1 ÷ the multiple.

    Chapter 5

Chapters

1

Revenue build: price, volume and mix

11 min

Growth is three things: charging more, selling more, and selling a different blend. Split it, because they are not worth the same.

  • Build revenue from price and volume, product by product
  • Split the change in revenue into price, volume and mix
  • Find the price rise a revenue target needs at flat volume
  • Say which kind of growth reaches EBITDA and which a buyer pays for
2

Operating leverage and the margin bridge

10 min

With fixed costs, EBITDA moves faster than revenue, in both directions. How much faster is the degree of operating leverage.

  • Calculate contribution, EBITDA, margin and the degree of operating leverage
  • Grow revenue and find next year's EBITDA and margin
  • Separate the effect of operating leverage from plain growth
  • Find the revenue a target margin needs
3

Cost-out programs

10 min

Pay once to save every year. The run-rate saving, the cost to achieve, the phasing, and why the exit multiple makes it worth it.

  • Calculate the run-rate saving, cost to achieve and year-one cash
  • Work out the cash payback allowing for phasing
  • Value the program at exit and net of its cost
  • Find the run-rate saving a value target needs
4

Working capital as a cash lever

10 min

Collect faster, hold less stock, pay suppliers later: cash comes out once, without touching EBITDA.

  • Calculate receivables, inventory, payables and net working capital from days
  • Calculate the cash conversion cycle
  • Work out the cash released by cutting DSO or stretching DPO
  • Find the days of DSO to cut for a cash target
5

Maintenance versus growth capex

10 min

Some capex keeps the business standing; some is a bet on more EBITDA. Why the split matters, and when cutting it destroys value.

  • Split capex into maintenance and growth, and calculate free cash flow before and after each
  • Value growth capex at the exit multiple and work out its payback
  • Find the growth capex a target increase in EBITDA needs
  • Show whether cutting growth capex before exit helps or hurts