Hi all, what are some common errors to look out for / try to spot when reviewing complex LBOs?
My thoughts: stub period, not adding PIK interest back to the cash flow statement, getting the NWC signs the wrong way around
Thanks!
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Based on the most helpful WSO content, here are some common errors to look out for when reviewing complex LBOs:
These are some of the critical areas to focus on to ensure the accuracy and reliability of an LBO model.
Sources: Working Capital considerations in LBO, Creating own LBO assumptions, What makes a good short?, 1st Yr Banking Analyst Open for Questions, When did LBO become a valuation technique?
How do you handle stub periods?
P&L: use =Yearfrac
BS: doesn't change with =Yearfrac, as if you think about it, you're just recording the resources and obligations of the business at a later period (rather it will be something like 9 months later rather than the full 12)
CFS: Any movements from the updated BS will be reflected here.
Normal CFS rules apply:
- Assets increase means cash flow decreases
- Liabilities increase means cash flow increases
- Account for standard financing decisions (ie changes in debt and possible equity raises/dividend distributions)
TBH you shouldn’t be messing up things like this.
Errors are usually more in the nuanced components like NOL builds, tax deductible interest, etc.
Hardo over here
Assuming this is for workplace not interview, in which case, PF goodwill calc doesn’t really apply / have much practical use. Beyond that, I’d say adding a cash or non cash “one time” cash flow item (like trapped cash, tax leakage, accounting adjustments) that you don’t then back out below the line (or do back out by mistake). If you’re doing an AVP, forgetting those adjustments if they affect your EV calc—this will lead to your IRR numbers not tying or being correct at times.
More presentation-wise, not updating your data table / not toggling cases correctly when updating deck. Can lead to jumbled numbers that are holdovers from last version.
Here's some that I wrote up for another similar thread:
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