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!

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chihayafull

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LBO test with negative earnings

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LBO test with negative earnings

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