What should be considered when projecting the company's statements in an LBO model?

When projecting a company's statements in a Leveraged Buyout (LBO) model, it is essential to consider the company's capital structure after the acquisition. The capital structure fundamentally influences how the company's earnings and cash flows are allocated to debt servicing and equity holders.

In an LBO, a significant amount of debt is typically used to finance the acquisition, meaning that the company's capital structure will shift considerably post-acquisition. This altered capital structure must be incorporated into the projections, as it affects interest expenses, tax shield benefits from the debt, and overall financial health. The resulting projections will reflect the cost of servicing that debt and the potential returns to equity holders, which are critical for understanding the viability and success of the LBO.

While factors like market conditions, industry trends, and management adjustments can be relevant in a broader context, they do not specifically dictate how the capital structure after the acquisition will influence the company’s financial statements. Focusing on the capital structure ensures that the model accurately reflects the financial obligations and scenarios unique to the post-acquisition environment, which is critical for investors and stakeholders evaluating the potential success of the transaction.