Paper LBO Example: A Full Walkthrough, Step by Step

The five-step structure every paper LBO follows

Interviewers vary the numbers, not the structure. Internalise the sequence and every paper LBO becomes the same problem.

• 1. Entry: purchase price = entry EBITDA × entry multiple. Split into debt and equity.
• 2. Project EBITDA: apply the growth rate for the hold period (usually 5 years).
• 3. Cash generation: estimate free cash flow available for debt paydown each year.
• 4. Exit: exit value = exit-year EBITDA × exit multiple. Subtract remaining debt for exit equity.
• 5. Returns: MOIC = exit equity ÷ entry equity. Convert MOIC to IRR with the standard approximations.

A fully worked example

The setup: a firm buys a company with $100m EBITDA at 8.0x, using 5.0x leverage. EBITDA grows 10% a year for 5 years. Assume 40% of EBITDA converts to cash available for debt paydown each year. Exit at the same 8.0x multiple.

Entry: purchase price = $800m. Debt = $500m, so equity cheque = $300m.

EBITDA path: $100m grows at 10% for 5 years → roughly $161m in year 5 (1.1^5 ≈ 1.61 — memorise it).

Debt paydown: cash for paydown ≈ 40% of EBITDA each year. Average EBITDA across the hold is about $130m, so ~$52m a year × 5 years ≈ $260m repaid. Remaining debt ≈ $500m − $260m = $240m.

Exit: $161m × 8.0x = $1,288m enterprise value. Exit equity = $1,288m − $240m ≈ $1,048m.

Returns: MOIC = $1,048m ÷ $300m ≈ 3.5x over 5 years. A 3.5x over 5 years is roughly a 28% IRR.

The MOIC-to-IRR conversions to memorise

Interviewers expect the conversion instantly. Memorise the 5-year table and interpolate for anything between.

• 2.0x over 5 years ≈ 15% IRR
• 2.5x over 5 years ≈ 20% IRR
• 3.0x over 5 years ≈ 25% IRR
• 4.0x over 5 years ≈ 32% IRR
• Rule of thumb: doubling in 3 years ≈ 26%, in 4 years ≈ 19%, in 5 years ≈ 15% (the rule of 72 works in reverse).

Where candidates lose the offer

The maths above is not hard. Candidates fail paper LBOs for predictable, avoidable reasons.

• Forgetting to subtract remaining debt at exit — the single most common error.
• Confusing EBITDA growth with revenue growth when the interviewer gives margin assumptions.
• Grinding through 1.1^5 long-hand instead of knowing compounding factors cold (1.05^5 ≈ 1.28, 1.10^5 ≈ 1.61, 1.15^5 ≈ 2.01).
• Not sanity-checking: if your MOIC comes out at 8x on market assumptions, say "that looks too high — let me re-check the debt paydown" out loud. Catching your own error scores points.
• Silence. Narrate the steps — the interviewer is assessing your process, not just the answer.

How to attribute the returns (the follow-up they always ask)

The classic follow-up is "where did the returns come from?", and it maps to the three levers: debt paydown, EBITDA growth, and multiple expansion. In the example above, there was no multiple expansion (in at 8x, out at 8x), so the 3.5x came from deleveraging (~$260m of debt repaid accrues to equity) and EBITDA growth ($61m of growth × 8x = ~$488m of value). Being able to decompose returns this way is what separates a memorised answer from an understood one — it is exactly what the LBO Sanity Check workflow in L3VLUP Skills walks through on real deals.