Module IV· Operating ForecastIntermediate
Question
What is the difference between the management case and the bank case in LBO modeling?
Answer
What
The management case and bank case are two parallel scenarios in the LBO model.
- Management case: from the seller / management, optimistic, the full growth story with all margin expansions and 100% of synergies.
- Bank case — a conservative sensitivity built by the sponsor, typically −10 to −20% sales growth, margin held flat, synergies at 50%.
Why the bank case matters
Lenders finance against the bank case. If the debt-service coverage ratio (DSCR) there falls below 1.5x, the Senior Debt amount is reduced — which shifts the entire equity structure.
Deep diveShow more details
Comparison of the two cases
| Aspect | Management case | Bank case |
|---|---|---|
| Source | Seller / management | Sponsor sensitivity |
| Sales growth | 100% of plan | −10 to −20% vs plan |
| EBITDA margin | full margin expansion | held flat |
| Synergies | 100% projected | 50% (banker discount) |
| Use | Pricing argument, IC memo | Lender tests, covenant headroom |
Typical IRR levels
- Management case: 25–30% IRR (the sponsor shows this to LPs)
- Bank case: 15–20% IRR, MOIC 1.5–2.0x (the sponsor uses this to assess downside risk)
Both cases run in parallel through the same scenario switch. The sponsor decides the equity investment based on bank-case IRR and covenant headroom — the management case serves to defend the story to LPs.
Pitch tip
Question: "Which case determines the equity check?"
Answer: "The bank case, because it drives the lenders' decision. The sponsor optimizes IRR in the management case but only commits once the bank case also holds up — DSCR above 1.5x, covenant headroom intact, MOIC above 1.5x"