Can’t get LBO projected balance sheet to balance.. help.
Hi All,
I seem to be repeatedly running into an issue with my balance sheet not balancing on LBO models. I’m doing cases for interviews and when I look at answer keys the figures are correct except for the debt balances. With a cash sweep they’re getting paid down too much (relative to answer key) which is causing my BS to be off. I figure it must have something to do with circularity but I can’t figure out how to fix it. I have iterations on with my max set to 100. Any clue what this could be?
Ah, the old LBO balance sheet balancing act. It's a classic, isn't it? Now, let's see if we can crack this nut together.
Firstly, it's great that you're already considering the impact of circularity. It's a common culprit in these situations. However, it's also important to remember that the cash sweep should only be applied after you've met all other obligations. So, if your debt balances are being paid down too much, it might be worth checking if you're applying the cash sweep correctly.
Also, remember that the cash sweep is typically applied to the most expensive debt first. So, if you have multiple layers of debt, make sure you're applying the cash sweep to the right one.
Lastly, it's worth noting that the balance sheet might not balance in every single year in an LBO model. This is because the cash sweep can cause the cash balance to fluctuate, which in turn affects the balance sheet. So, if your balance sheet is only slightly off, it might not be a cause for concern.
If you're still having trouble, it might be worth revisiting the WSO Academy courses or the Networking Guide. They have some great resources on LBO modeling that might help you troubleshoot your model. Keep at it, and remember, even the best of us get tripped up by balance sheets from time to time!
Sources: Mistakes on WSO PE Prep Pack Models?, Difficult Accounting Technical - IBD, Mezzanine Balance | Paper LBO Model, Sources and Uses statement - private LBO model
Why would it be your circularity?
Don’t fall into the trap of blaming the thing you understand least as the culprit if any issue. Instead, think about it logically.
If you are paying down too much debt when you sweep cash, it’s probably because you are generating too much free cash. When you turn the sweep off you should see more cash accruing to your balance sheet than in the answer key. Examine your cfs vs. the answer key. Are you adding too much cash or not subtracting enough? Are all of those cash flows linked properly throughout the rest of the model, especially where you calculate the cash you have left over for discretionary debt paydown?
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