Paper LBO

A Paper LBO is a streamlined version of a full leveraged buyout model that tests whether a candidate can quickly assess a deal's return potential using basic assumptions. Interviewers provide a handful of inputs — purchase multiple, EBITDA, leverage, growth rate, and exit multiple — and expect you to calculate the approximate IRR and MOIC within minutes. The exercise strips away the complexity of a full LBO model to focus on the fundamental drivers of returns: entry price, operational improvement, debt paydown, and multiple expansion or contraction.

Step 1: Calculate enterprise value at entry (EBITDA × entry multiple). Step 2: Build the sources and uses — determine how much debt vs. equity funds the purchase. Step 3: Project EBITDA over the hold period (typically 5 years) using the given growth rate. Step 4: Calculate cumulative free cash flow available for debt paydown — EBITDA minus interest, taxes, capex, and working capital changes. Step 5: Determine exit enterprise value (exit year EBITDA × exit multiple). Step 6: Subtract remaining debt from exit EV to get exit equity. Step 7: Calculate MOIC (exit equity ÷ entry equity) and approximate IRR.

The Rule of 72 helps approximate IRR quickly: if money doubles, IRR ≈ 72 ÷ years. A 2.0x MOIC over 5 years is roughly 15% IRR. A 3.0x over 5 years is roughly 25%. For more precision, memorize key benchmarks: 2.0x/5yr = ~15%, 2.5x/5yr = ~20%, 3.0x/5yr = ~25%. LBO returns come from three sources — EBITDA growth, multiple expansion, and debt paydown — and you should be able to attribute how much each contributes. The best candidates frame their answer around these three return drivers and quickly sanity-check whether the deal clears typical PE hurdles of 20%+ IRR.

You will typically be given a prompt like: 'A PE firm acquires a company for 8x EBITDA on $100M of EBITDA using 5x leverage. EBITDA grows 5% annually. Assume all excess cash pays down debt. Exit at 8x after 5 years. What are the returns?' The interviewer wants to see organized thinking, clean arithmetic, and awareness of what drives returns. Write your work neatly: entry EV, sources and uses, projected EBITDA, cumulative debt paydown, exit EV, exit equity, MOIC, and IRR. Narrate each step as you go — this demonstrates your thought process even if you make a small arithmetic error.