Paper LBO

Step 1: Purchase Enterprise Value

Purchase Enterprise Value = Entry EBITDA × Entry Multiple

Purchase Enterprise Value = $50m × 8.0x = $400m

This is the total price the buyer pays for the business, before deciding how much of it gets financed with debt versus equity. Rounding EBITDA and the multiple to clean numbers before multiplying is exactly the kind of simplification interviewers expect in a paper LBO — precision to the decimal isn't the point, getting the order of magnitude right, fast, is.

Step 2: Entry Debt and Equity Check

Entry Debt = $400m × 60% (0.60) = $240m

Entry Equity = $400m × 40% (0.40) = $160m

The equity check is the amount the PE fund actually has to write — everything else is borrowed. It's worth saying the leverage ratio out loud here too: $240m of debt against $50m of EBITDA is 4.8x Debt/EBITDA, a realistic leverage level for a standard LBO. Stating that sanity check signals you understand the deal isn't just arithmetic, it has to be financeable.

Step 3: Exit EBITDA

Exit EBITDA = $50m × (1 + 5%)^5

Compounding 5% (0.05) for five years is roughly a 28% (0.28) total increase — a useful mental shortcut is to add the growth rate for each year and nudge the total up slightly for compounding, rather than raising a decimal to the fifth power in your head.

Exit EBITDA ≈ $50m × 1.28 = $64m

This step is where a paper LBO diverges most from a full model: in Excel you'd carry the exact 1.2763 factor, but out loud, landing on "roughly $64 million" is both faster and exactly as useful to the interviewer, who is grading your process, not your precision.

Step 4: Exit Enterprise Value and Exit Equity Value

Exit EV = $64m × 8.0x = $512m

Remaining Debt at Exit = $240m × (1 − 50%) = $120m

Exit Equity Value = $512m − $120m = $392m

Because the exit multiple is held flat at 8.0x, every dollar of the increase in equity value here comes from two sources only: EBITDA growth and debt paydown. Separating those two levers — rather than crediting the whole gain to "the deal worked" — is what interviewers listen for when they ask a paper LBO question.

Step 5: Approximate MoM and IRR

MoM = $392m / $160m = 2.45x

IRR ≈ MoM^(1/5) − 1

A useful mental-math anchor: a 2.0x MoM over 5 years is roughly a 15% (0.15) IRR, and a 3.0x MoM over 5 years is roughly a 25% (0.25) IRR. A 2.45x return sits between those two anchors, closer to the midpoint, which puts the approximate IRR at roughly 20% (0.20) — close to the more precise calculation of about 19.6% (0.196).

Approximate IRR ≈ ~20%

Final Results

• Purchase Enterprise Value: $400m
• Entry Equity Check: $160m
• Exit Equity Value: $392m
• Multiple of Money (MoM): 2.45x
• Approximate IRR: ~20%

That approximate IRR is the number a PE fund would compare against its target return (typically 20-25% (0.20-0.25) for a standard buyout) to decide whether the deal clears their hurdle before anyone opens a spreadsheet.

Would you like to explore how this approximate IRR changes if the exit multiple compresses by one turn, from 8.0x to 7.0x?