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LBOs & paper LBOs6 min read

The paper LBO, step by step

The interview question

“Here's a company with $80 of EBITDA. Walk me through a quick LBO on paper.”

Paper LBOs test structure under pressure. Interviewers watch how you organize the steps at least as much as whether you hit the exact IRR.

The core idea

Five moves: price → debt and equity → cash generated → exit value → returns. Write each number down as you go.

The setup

Typical prompt: a company with $80 of EBITDA is bought at 9x, funded with 5x debt. EBITDA grows to $110 over five years, cumulative free cash flow of $220 goes entirely to debt paydown, and you exit at the same 9x. Find MOIC and IRR.

Worked example
The full paper LBO, one line at a time.
  1. 1Purchase price: 9 × $80 = $720.
  2. 2Debt: 5 × $80 = $400. Equity check: 720 − 400 = $320.
  3. 3Debt at exit: 400 − 220 of paydown = $180.
  4. 4Exit EV: 9 × $110 = $990. Exit equity: 990 − 180 = $810.
  5. 5MOIC: 810 ÷ 320 ≈ 2.5x. IRR: 2.5x over 5 years ≈ 20%.
About 2.5x and 20%, right at a typical sponsor's hurdle.

Where the gain came from

Equity grew by $490. EBITDA growth added 9 × $30 = $270 of value; paying down debt added $220; the multiple didn't change, so it added $0. Splitting returns this way, with no reliance on multiple expansion, is exactly what interviewers like to hear.

Run the deal yourself
IRR
20.4%
Money multiple
2.53x
$320
Equity in
$181
Debt at exit
$810
Equity out
Where the gain comes from
EBITDA growth+271
Debt paydown+219
Multiple change0

$80 of EBITDA, 45% of each year's EBITDA goes to paying down debt.

A similar deal in the LBO dials. Change the exit multiple to see how sensitive the result is.

Common twists

Working backwards: “what price can you pay for a 25% IRR?” 25% over five years ≈ 3x, so exit equity ÷ 3 = max equity; add debt to get the max price. Fees: add transaction fees to uses, which raises the equity check. Interest: if FCF isn't given, compute EBITDA − interest − taxes − capex − working capital each year.

Banker tip

Round aggressively and say so: “call it 2.5x, so roughly 20%”. Precision matters less than a clean structure and a sensible answer.

Say it like this

First I'd work out the purchase price, 9 times $80 of EBITDA, so $720, and split it into $400 of debt and $320 of equity. Over five years the company generates $220 of free cash flow that pays down debt, leaving $180. At exit, 9 times $110 of EBITDA gives a $990 enterprise value, so equity is $990 minus $180, or $810. That's about 2.5 times the $320 we put in, which over five years is roughly a 20% IRR.

Traps to avoid

  • ✕Forgetting to subtract remaining debt at exit.
  • ✕Using exit-year EBITDA for the purchase price, or entry EBITDA for the exit.
  • ✕Leaving out fees when the prompt includes them, which understates the equity check.

What they'll ask next

›How would the returns change at a 10x exit?

Exit EV rises by $110 to $1,100, exit equity to $920, MOIC to about 2.9x, IRR to about 23–24%.

›What if there's no debt paydown?

Debt stays at $400: exit equity $590, about 1.8x, roughly 13%. Debt paydown matters.

›What's the maximum price for a 25% IRR, keeping the $400 of debt?

25% ≈ 3x. Exit equity of $810 ÷ 3 = $270 of equity, plus $400 of debt = about $670, or roughly 8.4x EBITDA.

Check yourself

Question 1 of 3

Paper LBO: a company with $100 of EBITDA is bought at 10x, funded 60% with debt. How much equity goes in?

$

Put it all together

Cobalt Packaging · 20 min case study
Run an LBO on a packaging company

Sources and uses, five years of debt paydown, exit, IRR, and the most a sponsor could pay.