Leveraged Buyouts and LBO Models - Financial Statement and Debt Projections Questions and Correct Answers
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Course
LBO Modeling
Institution
LBO Modeling
1. Can you explain how to adjust the Balance Sheet in an LBO model? The adjustments are similar to those in an M&A deal, but in an LBO, you don't "combine" the Seller's Balance Sheet with the Buyer's since the "Buyer" is an empty shell corporation.
You still write down the company's Shareholders' ...
Leveraged Buyouts and LBO Models -
Financial Statement and Debt
Projections Questions and Correct
Answers
1. Can you explain how to adjust the Balance Sheet in an LBO model? ✅The
adjustments are similar to those in an M&A deal, but in an LBO, you don't "combine" the
Seller's Balance Sheet with the Buyer's since the "Buyer" is an empty shell corporation.
You still write down the company's Shareholders' Equity and replace it with the Investor
Equity the PE firm is contributing, you still create Goodwill and Other Intangible Assets,
and you might adjust the Deferred Tax-related items as well.
You also add the new Debt and possibly adjust the existing Debt on the L&E side of the
Balance Sheet; you adjust Cash on the Assets side for deal funding and transaction
fees. You may also write up or down Asset values.
You deduct one-time Transaction Fees from Retained Earnings and Financing Fees
from the book value of the new Debt issued.
2. How is Purchase Price Allocation different in LBO models? Does it matter more or
less than in M&A deals? ✅It's the same process as in M&A deals, but it tends to matter
far less because leveraged buyouts are based on cash flow, Debt repayment, and the
IRR from acquiring and then selling a company.
Many of the new items that get created in the PPA process, such as D&A on Asset
Write-Ups, affect the company's EPS but barely make an impact on its cash flow, which
is why many LBO models leave out this schedule.
3. How do you project Free Cash Flow and Cash Flow Available for Debt Repayment in
an LBO model? ✅You start with Net Income, add back D&A, factor in the Change in
Working Capital, and subtract CapEx to determine a company's FCF in a leveraged
buyout.
You should not add back Stock-Based Compensation because it creates additional
shares, reducing the PE firm's ownership in the company; it's easier to treat SBC as a
cash expense.
You might factor in other items such as Deferred Taxes, but these should not make a
huge difference for FCF.
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