Can you explain how the Balance Sheet is adjusted in an LBO model?

Let’s think about what happens in an LBO for a second. We know that the shares are bought and acquired by the PE firm and we know that debt is used to finance the transaction.

Let’s assume a 100% sale for the sake of simplicity.

Since all of the shares were sold, this means that the Shareholders’ Equity section of the Balance Sheet is cleared to zero and replaced with the PE firm’s purchased equity.

Since the PE firm used debt to finance the transaction, this new debt is added to the balance sheet.

On the Assets side, cash is adjusted. It either decreases by the cash used to finance the transaction, is cleared down to “cash required to operate”, or is increased by the amount of primary capital invested on the balance sheet by the PE firm. In an interview you can just say this is adjusted by the transaction and can be case specific.

Finally again on the Assets side, Goodwill is used as a “plug” to make the Balance Sheet balance.