If we are the private equity firm, when should we use management assumptions / projections in an LBO model? When shouldn’t we?

It’s important to due diligence management projections as they tend to be overly optimistic.

On the revenue side, each growth opportunity can be evaluated by examining the assumptions driving each growth opportunity.

For example, if the company wants to increase penetration in an existing geography, it’s worth understanding the density of their current presence in that geography and if there is room to capture additional wallet share.

If the company believes they can do add-on acquisitions, then it’s important to examine the pipeline of add-on acquisitions including how many are under a letter of intent (LOI), as well as the fragmentation of the competitive landscape.

Margins may be increasing in the forecast due to operational improvements. If so, it’s critical to understand what investments are being made to drive these operational improvements.

The more detail management can provide to backup their assumptions, the more credible their forecast is. Typically, your model should be a materially more conservative version of management projections.