Interview Question: LBO Modelling debt/liability-line items
Hi there,
I am practising building LBO models from scratch (starting with the three financial statements), rather than relying on online case studies where the main assumptions are already provided. This is in preparation for my interview.
One issue I am running into is determining which debt/liability line items should be considered as OldCo Debt that will be refinanced. Specifically, I am unsure whether Accrued Liabilities, Deferred Taxes, Accounts Payable, Provisions, and Other Current Liabilities should be included, or if I should only consider Short-Term and Long-Term Debt.
Looking forward to your help!
From what I have seen in transactions - you don’t refinance these liabilities in an LBO. Just the Oldco Debt.
Often times some of these other items can be considered “debt-like”and gets deducted from the purchase price (will usually just end up with additional cash on the balance sheet to offset these liabilities in the future).
Not always though, this is just a negotiations that goes in during SPA discussions.
For modelling purposes I would just repay debt and debt like.
Good question! In an LBO, you typically only refinance interest-bearing debt, meaning short-term and long-term debt. Things like accounts payable, accrued liabilities, deferred taxes, and other working capital items usually stay on the balance sheet. That said, always check the purchase agreement since some liabilities may be assumed or paid off in the deal. Hope that helps!
Thanks guys!
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