Cash Sweeps and Circular References in LBOs

If an LBO is going to break, it usually breaks in the debt schedule. The cash sweep and the interest calculation feed each other, a revolver sits on top, and every year depends on the year before. It's the part of the model where small mistakes compound for five years.

Here's how the mechanics work, where they go wrong, and how to check them quickly. The numbers come from SheetRank's Institutional Multi-Tranche LBO: a $600 million term loan priced at SOFR plus 400 (9% all in), 1% mandatory amortization, a $25 million minimum cash balance and a revolver with $50 million of capacity.

How the sweep works

Each year, the business generates cash. The sweep decides how much of it goes to repay debt early.

EBITDA
less capex
less change in NWC
less cash interest (term loan and mezzanine)
less taxes
plus interest earned on cash
less mandatory amortization
= cash available to repay the term loan early

Then the sweep is the smaller of that cash and the loan balance still outstanding after mandatory amortization, floored at zero:

=MAX(0, MIN(beginning balance - mandatory amortization, cash available))

In Year 1 of this model, that's $41.5 million of optional paydown on top of $6 million of mandatory amortization. By Year 5 the term loan is down from $600 million to $212 million.

Why it's circular

Interest depends on the debt balance. The debt balance depends on how much the sweep repays. The sweep depends on cash after interest. So interest depends on itself.

There are two common ways to handle that:

The model above uses beginning balances, which is what most timed modeling tests expect unless the prompt says otherwise. If you use averages, add a toggle cell that switches interest to beginning balance. When the model breaks, you can flip the toggle, fix the real problem and flip it back.

The errors that live here

A beginning balance that stopped rolling forward

Each year's beginning balance should equal last year's ending balance. If Years 2 to 5 are anchored to Year 1's ending balance with a dollar sign, the model keeps repaying the same balance every year. In this LBO that leaves $458 million of term loan at exit instead of $212 million, and the sponsor IRR falls from 16.2% to 12.2%. It's the single most expensive mistake you can make in the schedule.

The sweep ignores the minimum cash balance

If the sweep can spend cash below the minimum balance, the model pays down debt with money it isn't allowed to use. Returns look better and the cash line quietly goes to zero. Check the cash ending balance in every year: it should never sit below the minimum.

The sweep forgets mandatory amortization

Mandatory amortization is paid first, then the sweep uses what's left. If the sweep formula doesn't subtract it, the model double counts the cash and repays too much.

The revolver hardcoded to zero

In a healthy base case the revolver is never drawn, so a typed-in zero looks right. Run a downside case where cash falls below the minimum and nothing gets drawn. The revolver draw should be a formula along the lines of =MAX(0, minimum cash - cash before the draw).

PIK that never compounds

If a tranche has PIK interest, it's added to that tranche's balance, not paid in cash. The mezzanine here has 6% PIK on a $225 million balance, which grows to about $301 million by exit. A flat balance means the PIK fell out of the model, and returns rise from 16.2% to 17.5%.

Taxes calculated before interest

Interest is tax-deductible. If taxes are calculated on EBITDA, cash taxes are too high and the sweep is too small. Taxes should start from EBT.

A quick schedule check

Practice it

The weekly AI Audit and the full model list in Audit Mode include this LBO, built, with mistakes hidden in it. Debt schedules are where a lot of them end up. If you'd rather build the schedule from scratch first, the Circular Cash-Sweep LBO walks you through it cell by cell.