Paper LBO Example
A fully worked, step-by-step paper LBO — from the sponsor's entry equity check to MOIC and IRR — plus the mental-math shortcuts and mistakes that come up in private equity interviews.
The setup
What a paper LBO actually tests
A paper LBO is the canonical private equity interview exercise: you're handed a handful of assumptions and asked to compute a sponsor's return — no spreadsheet, no calculator, just a pen and your head. Interviewers use it because it reveals whether you understand how leveraged buyouts create value and whether you can stay organized under pressure.
The mechanics are always the same. A sponsor buys a company using a mix of debt and equity, grows the business, uses free cash flow to pay down debt, and sells a few years later. Your job is to trace that story in numbers: entry enterprise value, debt, the equity check, exit EBITDA, exit enterprise value, debt paydown, exit equity, and finally MOIC and IRR. Get the structure right and the arithmetic follows.
We'll work a clean example with round numbers so the logic — not the multiplication — is front and center.
Given assumptions
The walkthrough
Nine steps to IRR
- 01
Entry enterprise value
EBITDA × entry multiple = $100M × 10 = $1,000M
The sponsor buys the company for 10x its LTM EBITDA. That sets the total price of the business, before you split it into debt and equity.
- 02
Debt at entry
EBITDA × leverage = $100M × 5 = $500M
Lenders provide 5.0x of EBITDA in debt. This funds half the purchase price and is what makes the deal 'leveraged'.
- 03
Equity check (what the sponsor invests)
Entry EV − debt = $1,000M − $500M = $500M
The fund writes a $500M equity check. Everything that follows is about how much this $500M turns into at exit.
- 04
Exit EBITDA
Start + growth × years = $100M + $10M × 5 = $150M
EBITDA grows a linear $10M per year for five years. No compounding — the paper LBO keeps growth simple on purpose.
- 05
Exit enterprise value
Exit EBITDA × exit multiple = $150M × 10 = $1,500M
We assume a flat 10x exit multiple (no multiple expansion). The business is now worth $1,500M.
- 06
Debt paid down over the hold
FCF × years = $25M × 5 = $125M paid down
Every dollar of the $25M annual free cash flow sweeps against debt. Exit debt = $500M − $125M = $375M.
- 07
Exit equity
Exit EV − exit debt = $1,500M − $375M = $1,125M
After repaying lenders, $1,125M of equity value is left for the sponsor at exit.
- 08
MOIC (multiple of invested capital)
Exit equity ÷ entry equity = $1,125M ÷ $500M = 2.25x
The sponsor turns $500M into $1,125M — a 2.25x return on invested capital over the hold.
- 09
IRR (annualized return)
MOIC^(1/years) − 1 = 2.25^(1/5) − 1 ≈ 17.6%
Because there's a single cash flow in and a single cash flow out, IRR is just the geometric annual growth rate. 2.25x over five years ≈ 17-18%.
The answer
The sponsor turns a $500M equity check into $1,125M — a 2.25x MOIC and an ~17.6% IRR over five years.
Shortcuts
The MOIC-to-IRR rule of thumb
You will never compute a fifth root in your head. Instead, interviewers expect you to anchor to a memorized table for a five-year hold and interpolate. Learn these three anchors cold:
| MOIC (5-year hold) | Approx. IRR |
|---|---|
| 2.0x | ~15% |
| 2.25x | ~17-18% |
| 2.5x | ~20% |
| 3.0x | ~25% |
Our example lands at 2.25x, so an answer of “call it 17 or 18%” is exactly right — and saying it that way shows you know it's an estimate. The anchors scale: every extra 0.5x of MOIC over five years is worth roughly five points of IRR.
A second shortcut: to double your money (2.0x), you need roughly 15% over 5 years, 26% over 3 years, or 10% over 7 years. If the hold period changes, reach for the nearest anchor rather than recomputing from scratch.
Watch out
Common mistakes
Confusing enterprise value with equity value
The equity check is EV minus debt, not the full purchase price. Candidates who compute MOIC off the $1,000M EV instead of the $500M equity check get a wildly wrong answer.
Forgetting debt paydown
Free cash flow sweeps against debt during the hold. If you leave exit debt at the full $500M, your exit equity — and your MOIC — will be understated.
Compounding EBITDA growth
The standard paper LBO uses linear growth: +$10M each year, so +$50M total. Don't compound it; the interviewer wants clean arithmetic, not a DCF.
Silently assuming multiple expansion
Unless told otherwise, exit at the entry multiple. Quietly baking in multiple expansion inflates returns and signals you don't know where value actually comes from.
Reaching for exact IRR math
Nobody expects 17.6% to the decimal in your head. Anchor to the rule of thumb (2.0x ≈ 15%, 2.5x ≈ 20%) and interpolate — 2.25x lands around 17-18%.
FAQ
Paper LBO questions
What is a paper LBO?
A paper LBO is a mental-math exercise used in private equity interviews. You are given a company's EBITDA, entry multiple, leverage, hold period, growth, free cash flow, and exit multiple, then asked to walk from the sponsor's entry equity check to the exit equity, MOIC, and IRR — all without a calculator or spreadsheet.
Why do PE interviewers ask the paper LBO?
It tests whether you understand the mechanics of a leveraged buyout and whether you can do clean arithmetic under pressure. Interviewers care less about a perfect IRR and more about your structure: EV, debt, equity, growth, debt paydown, exit equity, MOIC, then IRR. It separates candidates who memorized formulas from those who understand how sponsors actually make money.
How do you estimate IRR from MOIC in your head?
Use the 5-year rule of thumb: a 2.0x return is roughly a 15% IRR, 2.5x is roughly 20%, and 3.0x is roughly 25%. Interpolate for values in between — a 2.25x MOIC over five years lands around 17-18%. For other hold periods, remember that doubling your money (2.0x) takes about 15% over 5 years, 26% over 3 years, or 10% over 7 years.
What numbers should I use if the interviewer doesn't give them?
Pick clean, round numbers so the arithmetic stays easy: $100M of EBITDA, a 10x entry multiple, 5x of debt, a 5-year hold, and a 10x exit multiple. Round figures let you focus on the structure of the LBO rather than the multiplication, which is exactly what the interviewer is testing.
How long should a paper LBO take?
Aim for three to five minutes. Interviewers expect you to talk through each step out loud — entry EV, debt, equity check, exit EBITDA, exit EV, debt paydown, exit equity, MOIC, then IRR. Practicing on randomized scenarios until the sequence is automatic is the fastest way to get there.
Reading it isn't practicing it
The candidates who nail the paper LBO have done it dozens of times. Practice with a randomized, instantly-graded paper LBO — new numbers every attempt, step-by-step feedback, timed like the real thing.