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Interview guide

Walk me through an LBO

The most asked question in private equity recruiting. Here is the structure interviewers score you against, a worked example with round numbers, and a free desk to rehearse it under time.

Rehearse it on the free Paper LBO desk

The five-part answer

  1. 01

    State the purchase price and the sources and uses

    Multiply entry EBITDA by the entry multiple to get enterprise value. Split that between debt and sponsor equity using the leverage multiple. Say both numbers out loud before moving on.

  2. 02

    Project the operating case

    Grow revenue and EBITDA at a stated rate across the hold period. Keep the assumption simple and defensible, then name the exit year EBITDA.

  3. 03

    Build the debt paydown

    Apply free cash flow to repay debt each year. State the sweep assumption explicitly so the interviewer can follow your arithmetic rather than guess at it.

  4. 04

    Exit and bridge to equity value

    Apply the exit multiple to exit EBITDA, subtract remaining net debt, and you have exit equity value to the sponsor.

  5. 05

    Compute and interpret returns

    Divide exit equity by entry equity for MOIC, convert to IRR, and then say whether the deal clears a typical hurdle and which assumption it is most sensitive to.

Guide

Why this question is asked

Interviewers are not testing whether you can recite a definition. They are testing whether you hold the whole capital structure in your head at once and can move between operating performance, debt, and equity returns without losing the thread.

The answer should take between ninety seconds and three minutes. Candidates who ramble fail not because the mechanics are wrong but because the sequence is disorganised. Sequence is the score.

A worked example with clean numbers

Assume a business with 100 of EBITDA, bought at 10.0x for an enterprise value of 1,000. Fund it with 5.0x leverage, so 500 of debt and 500 of sponsor equity.

Grow EBITDA at 5% per year over five years, which takes it to roughly 128. Assume 40% of each year's EBITDA sweeps to debt repayment, retiring roughly 220 of the original 500, leaving about 280 outstanding.

Exit at the same 10.0x on 128 of EBITDA gives an enterprise value of 1,280. Subtract 280 of remaining debt for 1,000 of equity value. Against 500 invested, that is a 2.0x MOIC, which converts to roughly a 15% IRR over five years.

Then close with judgement: the deal clears a typical 20% target only if you either grow EBITDA faster or exit above entry. Saying that unprompted is what separates a good answer from a complete one.

Where candidates lose points

Three failure modes account for most rejected answers.

  • Skipping sources and uses and jumping straight to returns, which leaves the interviewer unable to check your equity check.
  • Forgetting to subtract remaining debt at exit, which overstates equity value and inflates MOIC.
  • Quoting MOIC without converting to IRR, or converting incorrectly because the hold period was never stated.

How to rehearse it

Reading the script is not practice. Say it out loud against a clock until the sequence is automatic, then vary the inputs so you are not memorising one set of numbers.

The free Paper LBO Challenge runs the same five steps as a timed desk and grades each checkpoint, so you can find out which step is costing you time before an interviewer does.

Frequently asked

Rehearse it on the free Paper LBO desk

Run the same five steps against a ten minute clock and see which checkpoint slows you down. No signup, no card.

Rehearse it on the free Paper LBO desk

Related

Educational practice only. Not investment advice. Assumptions are simplified for interview preparation.