Why don’t you need a balance sheet to complete an LBO model and get a return?

To do an LBO model, we need to figure out the cash flows available for debt repayment. The amount of debt we can repay affects the ending debt balance, which impacts how much of the proceeds we get to keep when we sell the company.

To get to the cash flow available for debt repayment, we first need to project the income statement. The income statement also contains EBITDA which is needed to figure out how much the company is sold for upon exit at a given exit multiple.

The income statement then directly flows into the cash flow statement. Combining the first two sections of the cash flow statement – cash flow from operations and cash flow from investing – will get to cash flows available for debt repayment.

The balance sheet is not actually necessary from here since we now have everything we need to calculate returns. The purpose of the balance sheet is to display the value of the company’s assets to investors and especially creditors, who are interested in the value of the company’s collateral to understand how much value they can recover in case of default. The balance sheet also acts as a check to ensure the model is accurate.