What is the circular reference in an LBO model?

Published On - May 2, 2023

Josh Corporate Banking / Commercial Banking / Private Debt, Corporate Development, Financial Modeling, FP&A, Investment Banking, Private Equity

An LBO model is circular because of the interest expense. The interest expense on the debt pay reduces cash flow. This reduction in cash flow decreases the amount of debt you can repay back. By repaying back less debt, you will have a higher debt balance, which then increases your interest expense. Now we’re back to where we started – interest expense.