Walk Me Through an LBO

Start with the entry enterprise value: Entry EV = Entry EBITDA × entry multiple. State your assumptions out loud — e.g., 'Let's say we buy a company with $100M of EBITDA at a 10x multiple, so a $1.0bn purchase price.' This is also where you set the leverage: how much debt the company can support, typically quoted as a Debt/EBITDA multiple (often 4-6x depending on the market and the business's cash flow stability).

The Sources & Uses table shows how the deal is funded (sources) and what the money pays for (uses). Uses: the purchase of equity, refinancing of existing debt, and transaction/financing fees. Sources: new debt (term loans, senior notes, etc.) plus the sponsor's equity check, which is the plug. Equity = Total Uses − Total Debt. The single most important idea: the more debt you raise, the smaller the equity check, which (all else equal) amplifies returns — this is leverage. Less equity in means a higher percentage return on that equity at exit.

Project the company forward (usually 5 years). Grow revenue and EBITDA per your operating case, then build a simple debt schedule: the company generates free cash flow (EBITDA − cash interest − taxes − CapEx − change in working capital) and uses it to sweep down debt each year. As debt falls, interest expense falls, and equity value builds — even if the company is sold at the same multiple it was bought at. Debt paydown is a core return driver and the mechanic interviewers most want to hear you articulate.

At exit (year 5), compute Exit EV = Exit EBITDA × exit multiple. Subtract remaining net debt to get exit equity value. Returns are then expressed two ways: MOIC (exit equity ÷ initial equity invested) and IRR (the annualized return — see IRR vs MOIC). The three levers of return are: (1) EBITDA growth (revenue growth + margin expansion), (2) debt paydown / deleveraging, and (3) multiple expansion (selling at a higher multiple than you bought — the least reliable lever and one you shouldn't bank on).

If asked the follow-up 'what makes an ideal LBO target?', hit: strong and predictable free cash flow (to service debt), low CapEx and working capital needs, a stable/defensible market position, low existing leverage, hard assets or a recurring revenue base that lenders will finance, and a clear exit path. The opposite — cyclical, capital-intensive, high-growth-but-cash-burning businesses — are poor LBO candidates because the debt load is too risky.