A good LBO model should be able to incorporate a flexible deal date. The movement of this deal date though creates stub periods. And that's going to impact our financial statements. Let's have a look at an example. Here we have a financial year running from the 1st of January, year one, to the 31st of December. We're going to have a deal on the 1st of October of that year. That's going to be an LBO transaction. But the question now is, what figures are due to the acquirer? What profits, or what assets, and liabilities do they get to enjoy? Well, it's the stub period that we care about. And that's the part of the financial year after the deal date. Figures in this period are now owned by the acquirer. Because this company is going to be owned for October, November, and December, that gives us a stub period, which is 25% of the financial year. The period prior to the deal date is known as the roll forward period, and that's 75% of the financial year. This impacts the income statement that we're going to see at the end of the deal year. Only the stub period figures are gonna go to the acquirer. So how do we calculate this? Well, you take the target income statement for the deal year and you multiply it by the stub percentage. So you take their sales times by 25%, take their EBIT or EBITDA times it by 25%, et cetera. Now, this is important because as you go on modeling an LBO, you need to keep this in mind because there are a lot of income statement items that you do later on, particularly interest, amortization of debt issuance fees, or original issued discounts. We need to keep using that stub period percentage as you do it in just this year. When you go into year two, three, four, you don't need to worry about it at all. The balance sheet is also affected. On the deal date, we need a balance sheet immediately post-deal. To get this, we'll take the target balance sheet at deal date and we'll add on any deal effects, such as extra debt, et cetera. At the end of the deal year, do the same thing again. Take the target balance sheet, add those deal effects. And the same thing happens into the future, but it's getting that target balance sheet at deal date that's a little bit tricky. So that deal date balance sheet, that's where consolidation at the deal date create the balance sheet immediately post-deal. How can we calculate this? Well, you calculate it by taking the prior year balance from the 1st of January and you multiply it by the stub percentage. And then you take next year's balance at the 31st of December and you multiply it by the roll forward percentage. So that feels a bit counterintuitive. It feels like it's kind of the wrong way around. So let's see some numbers. Here we have net assets of 100 at the 1st of January. And at the 31st of December, we've got 112, but we need to know the balance sheet and assets on the 1st of October. Well, we are nine months through the year or 75% of our way through the year. If the net assets are growing from 100 to 112, we would expect to be 75% along that journey. So we would expect net assets to be 109, but let's do it using the formula.

I want to take the prior year balance of 100 and I want to multiply that by 25%. I then want to take next year's balance of 112 and multiply that by 75%. And basically, we're waiting our numbers towards the end of the year because that's when the transaction is happening, towards the end of the year. And that gets us to 109. Now, you know your balance sheet at the deal date. You can then add on your sources and uses of funds. Maybe new equity, some new debts, forecast them three months later. Maybe you've managed to pay off some of the debts at the end of the year. And then you can build the models for the years going forward, model out the full LBO, and come up with your IRR.