What tabs does a clean LBO model need?

Seven are enough: assumptions, sources and uses, a three statement operating model, a debt schedule, covenant tests, returns and waterfall, and sensitivities. Additional tabs usually indicate that inputs have leaked out of the assumptions tab.

How should payment in kind interest be handled?

As a toggle on the tranche. When it is on, accrued interest capitalises into the principal balance instead of being paid in cash, which improves near term cash flow and increases closing leverage. Both effects should be visible in the model at the same time.

How do you avoid circular references in the interest calculation?

Either calculate interest on the opening balance, which is simpler and slightly understates the charge, or use average balances with iterative calculation enabled and a documented switch to break the circularity. Whichever you choose, state it in the model.

Is this LBO structure free to use?

Yes. The structure on this page is free to use, adapt and cite for teaching, competitions and live work. It is provided by Reuben Ventures Pty Ltd (t/a Reuben AI) and is not financial advice.

LBO Model Structure: Sources, Uses, Debt Schedule, Waterfall

How to use this structure

This page sets out the structure of a clean leveraged buyout model tab by tab, with the inputs, the calculated rows and the outputs of each. It is written so you can rebuild it from scratch in a spreadsheet, or check an existing model against it, without needing a file.

The governing principle is separation. Inputs live in one place and are never buried inside formulas. Every assumption has a source or a stated rationale. The purpose of the model is to make the underlying bet legible, not to manufacture a return.

Tab 1. Assumptions

One tab. Every hard-coded number in the model lives here and nowhere else.

Transaction. Entry multiple, entry basis of earnings, transaction date, transaction fees, financing fees, rollover equity percentage.
Operating. Revenue driver by segment, price and volume split, gross margin path, operating expense growth, capital expenditure as maintenance and growth separately, working capital days for receivables, payables and inventory.
Financing. Each tranche with quantum, margin, base rate, amortisation profile, cash or payment-in-kind treatment, and fees.
Exit. Exit year, exit multiple, exit basis, transaction costs at exit.
Cases. A case selector, with the driver values for base, upside and downside held side by side so the difference between cases is visible on one screen.

Tab 2. Sources and uses

The transaction at close, balancing exactly.

Uses. Purchase of equity, refinancing of existing debt, transaction fees, financing fees, cash to balance sheet at close.
Sources. Each debt tranche, rollover equity, management equity, sponsor equity as the balancing figure.
Check. Sources less uses equals zero. This is the first cell a reviewer looks at.
Output. Opening capital structure, opening leverage on the adjusted earnings basis, and the sponsor ownership at close after rollover and the management pool.

Tab 3. Operating model

A three statement build driven from the assumptions tab.

Income statement. Revenue built from drivers rather than a growth rate, gross profit, operating expenses, earnings before interest, tax, depreciation and amortisation, depreciation, interest from the debt schedule, tax.
Balance sheet. Working capital driven by days assumptions, fixed assets rolled forward with capital expenditure and depreciation, goodwill from the opening transaction, debt from the debt schedule, equity rolled forward with retained earnings.
Cash flow. Operating cash flow, working capital movement, capital expenditure, cash interest, tax paid, mandatory amortisation, then the cash available for the sweep.
Check. The balance sheet balances in every projected period, and the cash flow statement ties to the movement in the cash line.

Tab 4. Debt schedule

Where most LBO models break. Build it as a waterfall of cash, in order of priority.

Order. Opening balance, mandatory amortisation, cash sweep from available cash, drawdown of the revolving facility if cash is short, closing balance.
Interest. Calculated on the average of opening and closing balance, with a stated circularity approach. If you avoid the circular reference, say how.
Payment in kind. A toggle that moves accrued interest into the principal balance rather than into cash interest, with the effect visible in both the cash flow and the closing leverage.
Revolver. Availability, commitment fee on the undrawn portion, and a peak drawn figure that can be compared to the working capital swing.
Check. No negative cash balance in any period, and the revolver never exceeds its commitment.

Tab 5. Covenant tests

The structure only matters if the model tests it.

Leverage covenant. Net debt to adjusted earnings, tested on the defined basis and stepping down over the term if the facility does.
Coverage covenant. Interest cover and, where applicable, fixed charge cover using the definition in the facility rather than a generic one.
Headroom. Percentage headroom in every period, with the tightest period flagged automatically.
Breach flag. A visible flag rather than a number the reader has to scan for. The downside case should be built to make this flag move.

Tab 6. Returns and waterfall

Who gets what, in what order.

Exit value. Exit enterprise value from the exit multiple, less net debt at exit, less exit costs, giving equity value.
Waterfall. Return of capital, preferred return, catch-up, then the carry split, applied in that order, with the management incentive pool treated explicitly.
Outputs. Internal rate of return and multiple of invested capital to the sponsor, and separately to management, with the cash flows shown by year.
Attribution. Split the equity return into earnings growth, debt paydown and multiple change. This single table is what a committee reads first.

Tab 7. Sensitivities

Two dimensional tables on the variables that actually move the answer.

Entry multiple against exit multiple.
Exit multiple against earnings growth.
Leverage at close against interest rate, read alongside the covenant flag rather than the return alone.
Exit year against exit multiple, since holding period and multiple interact.

Model discipline checklist

No hard-coded numbers outside the assumptions tab.
Maintenance and growth capital expenditure kept separate.
Interest calculated consistently, with the circularity treatment stated.
Working capital sized on the peak requirement, not the average.
Every case defined by named drivers rather than a blanket haircut.
A checks row that is visible on every tab and turns red rather than requiring inspection.
Return attribution present, so multiple expansion cannot hide inside the headline return.

How this maps to Reuben AI

The reason LBO models are fragile is that a spreadsheet has no memory of where a number came from. In Reuben AI the assumptions are structured entries with a source and an owner attached, so the model, the memo and the reporting pack all read the same value.

Cases are stored as named driver sets rather than as duplicated files, versions are tracked rather than saved as new filenames, and the debt schedule and covenant tests run against the fund's actual structure. When an assumption changes, everything downstream of it updates and the change is recorded.

LBO model shell