Case study — I have Q1 2026 financials given and FY25. I wonder if I can just forecast the future financials based on the past FYE fiscal year (or add a column reflecting LTM then do 2026A forecast/use Q1 financials to forecast rest of 2026A). But when it comes to DCF/LBO, I stub them? Or I should also stub the three statement operating model (how to? Assuming just use 1-stub on all line items?)
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When dealing with a stub period in an operating model, here's how you can approach it based on the most helpful WSO content:
Forecasting Future Financials:
Stub Period in DCF/LBO Models:
Stub Period in a Three-Statement Operating Model:
Practical Tips:
By following these steps, you can effectively handle stub periods in both operating models and valuation models like DCF or LBO.
Sources: DCF Modeling Course ~ Pre-training text.pdf, FP&A planing foreacasting and budgeting process? please help, Structuring and Flow in an M&A Model
Not just I totally get your question . In terms of forecasting, just do FY25 divided by 4 to roughly check what Q1 was so you can have a rough performance (obviously caveat of seasonalities) YOY, and use that on your FY25 numbers to forecast F26
The stub is just for the date of your valuation / entry. Is it 31st March entry? Either way, build the full year statement and then in your cash flows you just stub what you need (eg take 75% of the full year FCFE and add it to your entry cash overfunding the S&U). Am I missing anything or what’s your question specifically?
Thank you — was wondering if I need to stub the operating modeling for the line items across the three statements (feel like a lot of work to flow the stub thru), or I only need to factor in stubbing when it comes to doing the DCF cash flow and LBO (I.e forecast operating modeling based on FY25 figures but keep a column of LTMQ1 26)
Was also quite wondering how to stub LBO when it comes to debt schedule, BS, and return analysis as well.
I am not sure I get your concept of stub
You don’t need LTM figures other than to compute the entry valuation and sources and uses. Other than that The logic is that you can collect cash flows only for your ownership period. So if you assume march 31 entry, you are “entitled” to the cash generation until the end of the year So 75%. You need to build your statements for the entire year and up to any cash flows for debt repayment it doesn’t make a difference. You then. Assume you enter in March and will reset the cap structure to the deal cap structure. Now, if you have 100 of debt and 20 of cash as of entry, and you generate 30 of cash during the full year, the logic is that you can only use 75%* 30 to either pay down debt or add it to your cash balance. You shouldn’t stub the statements per se. Your IS doesn’t change (there’s some technicalities eg if the company has some debt you have the interest of the pre deal debt, and 75% of the full year interest of the new debt but this stuff doesn’t move the needle, I wouldn’t get bogged down for a case study)
As for the BS. I don’t know what the ask if but the way you should do it is just that you have a BS PF for the deal with the new cap structure etc (do you even have a full BS do? You just need some key lines). You have to imagine that’s the company BS as of 31st March
Then for your Dec26 BS the cap structure side you will have the changed based on the stub cash generation described above. The easiest way to think about it is just to think from the company perspective
sorry for typos or broken English I’m in a rush
Also if you take 75% of all your income statement and cash flow lines you end up with the same result as if you take 75% of the last line so there’s no need to stub the statements
You just stub the cash flows that accrue to the new owner (whether it’s for debt pay down/ dividend / sitting on balance sheet etc)
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