I have a couple questions for when you're constructing an LBO for a business with negative earnings: For tax, can you just multiply the tax rate with the pre-tax income and add it as a tax benefit rather than expense? I saw it being done like this in sample models online. If you have negative cash-flow and / or have mandatory amortization, would you be using a revolver to cover the gap?Are there an other nuances to consider when dealing with these sorts of scenarios in a model test? Thank you!

For tax, create a simple NOL schedule, you should never have tax be a positive. You could create a DTA (how much tax benefit you would get), and then apply it for future years tax expense. Or you could take the negative earnings and apply it next year to taxable income. Same thing. Sure, use revolver for whatever you need. I would cap your revolver capacity though, and if you need cash beyond your revolver capacity, then put an equity plug at the very bottom of your cashflow build. This equity infusion will flow into your IRR calcs

LBO test with negative earnings

I have a couple questions for when you're constructing an LBO for a business with negative earnings:

For tax, can you just multiply the tax rate with the pre-tax income and add it as a tax benefit rather than expense? I saw it being done like this in sample models online.
If you have negative cash-flow and / or have mandatory amortization, would you be using a revolver to cover the gap?
Are there an other nuances to consider when dealing with these sorts of scenarios in a model test?

Thank you!

531 WSO Academy Private Equity Session Reviews: 4.82/5

Class of '24 Dec 2025 Cohort

5.00/5

Private Equity Mock Coffee Chat

“Julius was extremely helpful in breaking down the accounting concepts, especially allowing me the opportunity to walk through a question step by step on how the three financial statements are impacted across income, cash flow and balance sheet along with figuring out the mental math for it all. The concept for Equity Value to Enterprise value and bridging between the two were fairly straight forward. Along with the networking advice on reaching out to potential recruiters for Investment banking roles and how lateral recruitement is happening year end vs going into Q1 next year.”

Saint Joseph's University

Class of '10 Oct 2026 Cohort

5.00/5

Private Equity 7 Stories Review

“Very helpful. Practical tips and actionable feedback. Will schedule follow up sessions with him in the upcoming weeks”

See All 11,568 WSO Academy Reviews

1 Comments

chihayafull

PE

1y

Most Helpful

Omnis voluptatem consequuntur dignissimos. Sed quas quis facilis quo molestias sapiente.

Modi omnis consequuntur inventore. Est magni ad impedit numquam magni molestiae sed omnis. Voluptatibus ipsum officia sed eum blanditiis. Ut aut aut sed. Quae sunt quaerat enim tenetur recusandae.

Reply

Quote

Report

Other

Authored by: Certified Private Equity Professional - 2nd Year AssociateCertified Private Equity Pro

+48	Del	26	7h
+32	How Do You Train PE Juniors When Banks Do All the Modelling?	14	1d
+30	Vibe-Working in Finance with AI ? What about you	13	2h
+29	PE VP: Thoughts on Quitting with Nothing Lined Up?	7	8h
+26	Cognitive decline	6	20m
+20	Tier 4-5 City - Go to work for micro PE?	3	6d
+19	Anthropic IPO Wealth Creation	12	1d
+18	Acquisition Deal Structure: More Cash at Close vs. Smaller Equity Rollover in a Holdco	3	1d
+18	How do PE funds choose their advisors?	7	1d
+17	Is buyside worth it if most associate programs are 2 and out?	4	1d

1	redever	99.2
2	kanon	99.0
3	Secyh62	99.0
4	BankonBanking	99.0
5	Betsy Massar	98.9
6	DrApeman	98.9
7	GameTheory	98.9
8	dosk17	98.9
9	CompBanker	98.9
10	Kenny_Powers_CFA	98.8

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

LBO test with negative earnings

Score Breakdown

Feedback

Score Breakdown

Feedback

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

LBO test with negative earnings

See All Comments - 100% Free

Trending Content - Private Equity Forum