LBO Balance Sheet Assumptions

When you're tackling an LBO model for a PE case and find yourself with limited balance sheet figures, particularly when only Net Working Capital (NWC) items are provided, it's crucial to approach the situation methodically to ensure your balance sheet balances correctly. Here are some best practices based on the most helpful WSO content:

1. Start with the Basics: Ensure that your initial LBO model setup correctly accounts for the purchase price allocation, including how much debt and equity are used to finance the acquisition. This will impact your starting balance sheet.

2. Use Historical Ratios: If the company's historical balance sheet data is available, use historical ratios of balance sheet items to sales or EBITDA to estimate missing figures. This can help in projecting items like fixed assets, long-term debt, and equity.

3. Simplify Where Possible: As highlighted in the WSO Dataset, for LBO modeling, it's often unnecessary to include overly complicated balance sheet items like OID, asset step-ups, NOLs, etc. Focus on the key components that will impact the LBO's outcome.

4. Adjustments for NWC: Given that you have NWC items, ensure you're accurately projecting changes in NWC over the investment period. NWC adjustments can significantly affect cash flow and, consequently, the balance sheet's balancing.

5. Plug Figure: If after careful estimation and projection your balance sheet still doesn't balance, consider using a plug figure, such as 'excess cash' or 'short-term borrowings' to balance the equation. This is not ideal but can be a practical short-term solution.

6. Iterative Process: Balancing the balance sheet in an LBO model is often an iterative process. Revisit your assumptions and projections, especially around debt schedules and interest payments, as these can significantly impact the liabilities and equity side of the balance sheet.

7. Seek Precedent Models: As suggested, asking for precedent models from older analysts can be incredibly helpful. These models can provide a reference point for how to structure your balance sheet and make reasonable assumptions.

8. Critical Review of Assumptions: Finally, ensure that all your assumptions, especially those related to growth, margins, capex, and leverage, are justifiable and supported. As noted in the WSO threads, being able to defend your assumptions is crucial, not just for the sake of the model but also for your understanding and presentation of the case.

Remember, practice is key. The more you work on LBO models, the more intuitive balancing the balance sheet will become. And always, when in doubt, reaching out for guidance from more experienced peers or mentors can provide invaluable insights.

Sources: 7 Practical Buyside Recruiting Tips for IBD Analysts, PE case study mistakes, 20 balance sheet ratios every investor should be aware of, Best Practices for Junior Bankers - Top 10 Things to Do, Working Capital considerations in LBO