A net operating loss, or NOL, generally arises when a company’s tax deductions exceed its taxable income. Subject to applicable tax rules, the company may carry the loss forward and use it to offset taxable income in future periods.
NOLs matter in deal models because lower cash taxes increase free cash flow. In an LBO, that additional cash can support debt repayment. In an M&A model, it can improve the acquired company’s cash contribution and potentially increase accretion.