What is the purpose of projecting financial statements in an LBO?

Projecting financial statements in a leveraged buyout (LBO) is primarily focused on estimating future cash flows, which are crucial for debt repayment. In an LBO, financing is heavily reliant on the generated cash flows of the acquired company to service the debt incurred during the acquisition. The projection of financial statements allows analysts to forecast revenues, expenses, EBITDA, and ultimately cash flows over a specific time horizon.

These cash flow projections provide insights into how much cash the company will generate after meeting operational needs and how much can be allocated towards servicing the debt. The ability to accurately project these financials helps determine if the company can sustain its debt levels and supports strategic decision-making regarding the viability of the investment. By assessing cash flows, stakeholders can also evaluate the risk associated with the transaction and the timing and amounts of expected returns.

In this context, the correct emphasis on cash flow projections explains why they hold significant importance in LBO scenarios as they directly influence the financial health post-acquisition and the overall success of the investment strategy.