How to build an LBO model
PE Simulator editorial teamPublished 12 Oct 2026Last reviewed 12 Oct 2026
The build order for a leveraged buyout model. Five blocks, each one finished before the next one starts, with free desks for the arithmetic.
To build an LBO model, finish five blocks in order. Balance sources and uses. Build a debt schedule that pays interest and principal from cash the business can spare. Forecast revenue, EBITDA, and free cash flow. Compute MOIC and IRR from the equity check and the exit equity value. Then sensitize entry, exit, growth, and leverage. Do not start with the returns page.
Build one on the paper LBOBuild order
01
Sources and uses
Set the entry enterprise value and list every use of cash: equity purchase, refinance of old debt, fees, and any cash left on the balance sheet you are funding. List every source: new debt tranches, rollover equity if you truly have it, and the sponsor equity check. Sources must equal uses before you type a single forecast year. If they do not, the returns you compute later are a residual of a broken close, not a view of the deal. Name the equity check in one cell and never overwrite it with a plug that hides a gap.
02
Debt schedule
Give each tranche an opening balance, a rate, and a repayment rule. Cash interest and any required amortization come out of the cash the forecast can actually produce. A sweep of extra cash is a choice, not a law. Revolver draws cover shortfalls. Ending debt is the input to the next year and to the exit equity value. Circular interest is allowed only after the cash flow statement balances without it. If you cannot explain the ending balance of each tranche, the schedule is not done. Use the debt schedule tool to see the mechanics before you bury them in a full workbook.
03
Forecast
Build a small operating forecast the debt schedule can read. Revenue, a margin bridge to EBITDA, cash taxes, working capital, and maintenance spending. Free cash flow after interest is what the sweep and the revolver argue over. Keep the forecast shorter than your ambition. Five years is enough for a first model. Every driver should be a number you can defend in a sentence. Growth that exists only to make the returns target is not a forecast. It is a wish you typed into a growth rate.
04
Returns
Exit enterprise value is exit EBITDA times an exit multiple you chose on purpose. Equity value to the sponsor is that enterprise value, minus net debt at exit, plus any leftover cash you did not already net. MOIC is exit equity divided by the equity check from sources and uses. IRR is the annualized return on that same equity outlay over the hold, including any dividends you actually modeled. If you did not model a dividend, do not pretend one exists. Read both numbers. A high IRR on a tiny check can be a bad deal. A fair MOIC over a long hold can be a slow one.
05
Sensitivity
Flex the four assumptions that move equity value the most: entry multiple, exit multiple, EBITDA growth, and opening leverage. Hold the rest of the model still so you can see one change at a time. A two-way table of entry against exit is the minimum. Add a downside column where growth is slower and the sweep is weaker. The recommendation is the cell you would still own, not the cell in the center of the table. If the deal only clears your hurdle in the optimistic corner, say that in the memo.
Guide
Why the order is the model
How to build an LBO model is mostly a question of sequence. Candidates who start on the returns page type the answer they want and then force the debt and the forecast to agree. Reviewers notice, because the equity check, the ending debt, and the exit equity value will not tie. The five blocks above are the same order a deal team uses when the workbook is real: close the funding, teach the debt to talk to cash, forecast only what the debt needs, then read returns, then break the case on purpose.
The walk-through guide is the ninety-second version of this sequence. Use it when someone asks you to speak. Use this page when someone hands you a blank sheet. They should describe the same deal. If your spoken case and your built case diverge, the built case is the one you do not yet understand.
LBO valuation, earlier in the private equity deal lifecycle, is the decision this model supports. Do not confuse the workbook with the judgment. The model tells you what the returns are under the assumptions you typed. The investment case tells you whether those assumptions belong to the company you sourced.
What each block is allowed to know
Sources and uses know the entry price, the fees, the old debt, and the new capital structure. They do not know next year's EBITDA. The debt schedule knows opening balances, rates, and the cash the forecast hands it. It does not get to invent EBITDA to make a covenant pass. The forecast knows volume, price, cost, tax, working capital, and spending. It does not know the exit multiple. Returns know exit EBITDA, the exit multiple, and net debt. Sensitivity knows which four inputs you are willing to flex, and it does not get a fifth plug.
That separation is how you audit. When MOIC looks heroic, walk backward. Did exit net debt come from the schedule. Did the schedule get its cash from the forecast. Did the equity check come from sources and uses. The first block that used a number from the future is the block you rebuild. How to build an LBO model, practiced this way, is a debugging habit as much as a formatting habit.
Fees, minimum cash, and rollover equity are where quiet plugs hide. If management rolls equity, it is a source and it reduces the sponsor check, and it also shares the exit. Model both sides or leave rollover at zero. If you need cash trapped for operations, it is a use at close and a part of net debt at exit. Pick one treatment and keep it.
Where to practice each block
You do not need a sixty-tab workbook to learn the sequence. The paper LBO runs sources and uses, a simple hold, debt paydown, and returns under a timer. The debt schedule tool isolates interest and amortization so you can see a tranche move. The EBITDA multiple tool keeps entry value honest. The LBO returns sandbox shows how hold length and exit assumptions move MOIC and IRR after you already have a case. It is a returns desk, not a renamed IRR calculator. Use the IRR calculator only when you are holding a series of dated cash flows and you want the rate.
A clean practice hour looks like this. Build sources and uses for a company you can explain. Stand up one term loan and one revolver. Forecast three drivers. Read MOIC and IRR. Then worsen growth and watch the revolver draw. If you cannot narrate that path, you are not done, even if the formatting is pretty. Then put the same company on the private equity deal lifecycle and ask whether the sourcing screen and the growth plan still agree with the case you just built.
Frequently asked
Build one on the paper LBO
The timed paper LBO uses the same checkpoints. Open the 7-day trial from pricing when you want the full desks.
Build one on the paper LBORelated
Educational practice only. Not investment advice. Assumptions are simplified for interview preparation.