In an LBO model, which step involves adjusting the balance sheet to reflect the new debt and equity and adding goodwill and other intangibles to balance?

In an LBO model, which step involves adjusting the balance sheet to reflect the new debt and equity and adding goodwill and other intangibles to balance?

• A. Step 3
• B. Step 2
• C. Step 4
• D. Step 1

Answer: (A)

This step tests how the closing of an LBO is reflected on the balance sheet. When financing is arranged, you must book the new debt on the liabilities side and the new equity on the equity side to show the actual capital structure after the deal closes. At the same time you perform a purchase-price allocation: allocate the total purchase price to the target’s identifiable assets and liabilities at fair value, and record any remaining amount as goodwill and other intangible assets. This creates a pro forma balance sheet that balances and provides the correct starting point for forecasting debt repayment and future cash flows. Other parts of the model focus on sourcing funds or projecting income statements and exits, not on reconciling the balance sheet at close.

This step tests how the closing of an LBO is reflected on the balance sheet. When financing is arranged, you must book the new debt on the liabilities side and the new equity on the equity side to show the actual capital structure after the deal closes. At the same time you perform a purchase-price allocation: allocate the total purchase price to the target’s identifiable assets and liabilities at fair value, and record any remaining amount as goodwill and other intangible assets. This creates a pro forma balance sheet that balances and provides the correct starting point for forecasting debt repayment and future cash flows. Other parts of the model focus on sourcing funds or projecting income statements and exits, not on reconciling the balance sheet at close.