LBO cash flow, tax and funding shortfall

Methods and settings

From unlevered to deal cash generation

LBO reads operating FCFF from the chosen model basis. It reverses normalized operating tax, subtracts deal cash interest and then subtracts the separate deal cash tax. PIK increases debt rather than consuming cash, although its tax treatment can affect cash tax. Review the annual rows for cash generation, mandatory repayment, sweep, distributions and closing cash.

Use a separate current-tax ledger

Taxable earnings begin with EBIT less cash interest and, if enabled, PIK. The deal inherits the Model’s enabled NOL policy. Entry NOL may be inherited or reset; if NOL policy is off, no loss-carryforward benefit is created. Under the enabled policy, losses generate NOL and later positive taxable earnings can use it. The schedule shows opening, generated, used and closing NOL.

Keep minimum cash funded

At entry, cash is at least the minimum; any required top-up is an acquisition use. During ownership, mandatory debt payments happen before sweep. Interim distributions are then deducted. Closing cash below the minimum creates a funding shortfall. Any such shortfall makes sponsor IRR and MOIC unavailable until you change the debt, cash, distribution or operating assumptions to fund it.

Identify an unfunded distribution

Suppose opening cash 20 plus deal cash generation 80 leaves 100. Mandatory debt payments 70 leave 30. With minimum cash 20 and a 100% sweep,10 is swept and 20 remains. An additional distribution 5 then leaves 15: the shortfall is 5. The model does not assume an extra sponsor contribution to make that distribution feasible.

Current policy boundaries

Cash tax is paid in the same period; losses do not create an automatic refund. There is no deferred-tax calculation, jurisdiction-specific deductibility test or interest-limitation regime. This ledger also does not post back to Model tax or Credit schedules. Read its result as the explicitly selected deal-tax convention, not a legal tax opinion.