What balances the LBO model in the Sources & Uses of Fun

[wstguest]

Full Question:
What balances the LBO model in the Sources & Uses of Funds?

[wstexpert]

Two methods are used to balance the LBO model. The first and preferred method is by using the amount of equity in the sources section of the model as a variable. This allows you to maximize the amount of debt used in the transaction, thus increasing the rate of return for the entity providing equity in the transaction. The second method is to set a specific amount of equity contribution from the private investor and use the revolver to balance the model. This latter method is less ideal since you may not be fully maximizing the debt capacity which is the point of an LBO to begin with (lever up with debt).