What is the first adjustment made on the Balance Sheet when modeling a Leveraged Buyout (LBO)?

In modeling a Leveraged Buyout (LBO), the first adjustment made on the Balance Sheet is to add new debt from the buyout. This adjustment reflects the financing structure of an LBO, where a significant portion of the purchase price is funded through debt.

In an LBO, the financial sponsor (often a private equity firm) typically uses borrowed funds to acquire the target company. This new debt is recorded on the Balance Sheet as a liability, which directly impacts the capital structure and allows the acquiring entity to define its leverage ratio.

The inclusion of this debt also sets the stage for subsequent modeling adjustments, as it affects interest expenses, cash flows, and the overall risk profile of the investment. In the context of an LBO, the acquisition is primarily financed through this leveraged debt, so capturing this element early is crucial for accurately reflecting the company’s financial position post-buyout.

Other options don’t represent the immediate first step in the process. Adjusting shareholders' equity typically occurs after accounting for the debt and equity used in the transaction. Reducing assets and writing off goodwill may occur later, but they are not the initial adjustments that highlight the financing mechanism central to an LBO.