Paper LBO Example: How to Solve It in 10 Minutes (With Practice Problems)

The paper LBO is a staple of private equity interviews. You're given basic information about a deal and asked to calculate returns—without Excel. It tests whether you truly understand LBO mechanics or just know how to follow a template.

Here's the framework that works.

What Is a Paper LBO?

A paper LBO is a simplified leveraged buyout analysis done with pen and paper (or mental math). You're typically given:

• Purchase price or EBITDA multiple
• EBITDA (and sometimes growth rate)
• Debt/equity split
• Hold period
• Exit multiple

You calculate IRR and/or MOIC.

The 5-Step Framework

Step 1: Calculate Entry Value and Structure

Given: Company has $100M EBITDA, purchased at 10x EBITDA with 60% debt / 40% equity.

Calculate:

• Enterprise Value = $100M × 10x = $1,000M
• Debt = $1,000M × 60% = $600M
• Equity = $1,000M × 40% = $400M

Step 2: Project EBITDA at Exit

Given: 5-year hold, EBITDA grows 5% annually.

Calculate:

• Year 5 EBITDA = $100M × (1.05)^5 = $127.6M

Shortcut: 5% growth for 5 years ≈ 28% total growth. $100M × 1.28 = $128M (close enough).

Step 3: Calculate Exit Value

Given: Exit at 10x EBITDA (same as entry).

Calculate:

• Exit Enterprise Value = $127.6M × 10x = $1,276M

Step 4: Calculate Equity Proceeds

Assumption: Debt remains constant (no paydown) for simplicity. Many paper LBOs assume this or give you the debt paydown.

Calculate:

• Equity Value at Exit = $1,276M - $600M = $676M

If debt paydown is given:

• Assume $100M debt paid down → Remaining debt = $500M
• Equity Value = $1,276M - $500M = $776M

Step 5: Calculate Returns

MOIC (Multiple of Invested Capital):

• MOIC = Exit Equity / Entry Equity = $676M / $400M = 1.69x

IRR (Internal Rate of Return): Use the "Rule of 72" for quick estimates:

• 2x in 5 years ≈ 72/5 = ~14-15% IRR
• 1.69x is less than 2x, so IRR is below 15%

More precise: 1.69x over 5 years → IRR ≈ 11%

Quick IRR Rules (Memorize These)

The Rules:

• Rule of 72: Double your money → IRR ≈ 72 ÷ years
• Rule of 114: Triple your money → IRR ≈ 114 ÷ years
• Rule of 144: Quadruple your money → IRR ≈ 144 ÷ years

The Three Value Drivers

LBO returns come from three sources. Understand these to sanity-check your work:

1. EBITDA Growth

Growing the business increases exit value.

2. Multiple Expansion

Exiting at a higher multiple than entry increases value. (Note: Assuming constant multiple is conservative.)

3. Debt Paydown

Paying down debt transfers value from debtholders to equity.

In our example:

• Entry equity: $400M
• Exit equity: $676M
• Value created: $276M
  • From EBITDA growth: $276M (all of it, since no multiple expansion or debt paydown)

Practice Problem #1

Given:

• EBITDA: $50M
• Purchase multiple: 8x
• Debt: 50% of purchase price
• Hold period: 4 years
• EBITDA grows to $65M
• Exit multiple: 8x
• Debt paid down by $50M

Solve for MOIC and IRR.

Solution:

1. Entry EV = $50M × 8 = $400M
2. Entry Debt = $200M, Entry Equity = $200M
3. Exit EBITDA = $65M (given)
4. Exit EV = $65M × 8 = $520M
5. Exit Debt = $200M - $50M = $150M
6. Exit Equity = $520M - $150M = $370M
7. MOIC = $370M / $200M = 1.85x
8. IRR: 1.85x over 4 years ≈ 16-17% (between 1.5x/11% and 2x/19%)

Practice Problem #2

Given:

• Purchase price: $500M
• Entry EBITDA: $50M (implies 10x entry multiple)
• 5-year hold
• EBITDA grows 10% per year
• Exit multiple: 9x (compression)
• Debt: $300M at entry, paid down to $200M at exit
• Equity: $200M at entry

Solve for MOIC and IRR.

Solution:

1. Exit EBITDA = $50M × (1.10)^5 = $80.5M (or estimate: 50% growth → $75M)
2. Exit EV = $80.5M × 9 = $724.5M
3. Exit Debt = $200M
4. Exit Equity = $724.5M - $200M = $524.5M
5. MOIC = $524.5M / $200M = 2.6x
6. IRR: 2.6x over 5 years ≈ 21% (between 2.5x/20% and 3x/25%)

Common Interview Variations

"What if we achieve cost synergies?"

Add synergies to EBITDA before calculating exit value.

"What if we pay down debt from cash flow?"

Estimate annual free cash flow, multiply by years, subtract from debt.

"What's the minimum exit multiple needed for 20% IRR?"

Work backwards: 20% IRR over 5 years needs ~2.5x MOIC. Solve for exit multiple.

"What's the sensitivity to entry multiple?"

Lower entry = lower initial equity = higher MOIC for same exit.

The Key to Nailing Paper LBOs

1. Know the framework cold — Don't waste time figuring out steps during the interview.
2. Memorize the IRR shortcuts — You can't calculate precise IRR by hand, so the rules are essential.
3. State assumptions clearly — "I'm assuming no debt paydown" or "I'm using 5% annual growth."
4. Show your work — Interviewers want to see your thinking process.

Want to master LBO modeling end-to-end? Our PE Recruiting Playbook covers LBO frameworks and technical prep.

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