How to Answer 'Walk Me Through an LBO' — With Examples

Why the LBO Question Matters

"Walk me through an LBO" is one of the top three technical questions in both investment banking and private equity interviews. At firms like Blackstone, KKR, Apollo, and Warburg Pincus, you can expect some version of this question in every single interview round.

The question tests whether you understand how private equity firms actually make money. If you cannot explain an LBO clearly and concisely, you will not get an offer at any serious PE fund — and you will struggle in IB interviews as well.

The Step-by-Step Framework

Here is how to walk through an LBO in 60-90 seconds:

Step 1: Purchase the Company

• A private equity firm acquires a target company at a certain purchase price, typically expressed as a multiple of EBITDA (e.g., 10x EBITDA)
• The acquisition is funded with a mix of debt (60-70% of the purchase price) and equity (30-40% from the PE fund)
• Create a Sources & Uses table: Sources include term loans, senior notes, mezzanine debt, and sponsor equity. Uses include the purchase price, financing fees, and transaction fees

Step 2: Build the Operating Model

• Project the company's revenue, EBITDA, and free cash flow over a 5-7 year hold period
• Key assumptions: revenue growth, margin expansion or contraction, capex, and working capital changes
• The operating model drives how much debt the company can pay down

Step 3: Pay Down Debt

• The company uses its free cash flow to pay down debt over the hold period — this is called deleveraging
• Mandatory amortization payments come first, then optional prepayments (cash sweeps)
• Debt paydown is one of the three key drivers of PE returns

Step 4: Exit the Investment

• After 5-7 years, the PE firm sells the company, typically at an exit multiple of EBITDA
• Common exit routes: sale to a strategic buyer, sale to another PE fund (secondary buyout), or IPO
• Calculate the exit enterprise value and subtract remaining net debt to get exit equity value

Step 5: Calculate Returns

• MOIC (Multiple of Invested Capital) = Exit Equity Value / Initial Equity Investment
• IRR (Internal Rate of Return) = The annualized return on equity over the hold period
• PE firms target a minimum of 2.0-3.0x MOIC and 20-25%+ IRR

The Three Drivers of LBO Returns

Interviewers love to ask this as a follow-up. The three ways PE firms generate returns are:

1. EBITDA growth: Growing the top line and/or expanding margins (operational improvement)
2. Debt paydown: Using free cash flow to reduce leverage, increasing the equity share of value
3. Multiple expansion: Selling at a higher EBITDA multiple than the purchase multiple

Example: Quick LBO Math

Say you buy a company for $1 billion at 10x EBITDA ($100M EBITDA), using 60% debt ($600M) and 40% equity ($400M).

Over 5 years:

• EBITDA grows to $140M (7% annual growth)
• You pay down $250M of debt (remaining debt: $350M)
• You exit at 10x EBITDA (same multiple)

Exit enterprise value: $140M x 10 = $1.4B Exit equity: $1.4B - $350M debt = $1.05B MOIC: $1.05B / $400M = 2.6x IRR: roughly 21% over 5 years

Common Follow-Up Questions

• "What makes a good LBO candidate?" (Stable cash flows, low capex, market leadership, cost-cutting opportunities)
• "Would you rather have 2x MOIC or 25% IRR?" (Depends on time horizon — short hold favors IRR, long hold favors MOIC)
• "How does adding more leverage affect returns?" (Increases equity returns if the deal works, but increases risk of default)

Practice articulating this framework out loud until it is second nature. See our complete LBO interview questions guide for more practice. IB Flash includes dozens of LBO-specific drills in our Question Bank to help you get there.