The format you're actually facing
A paper LBO is exactly what it sounds like: a leveraged buyout model built by hand — pen, paper, and a calculator — in about 30 minutes, usually in the middle of a private equity interview. The interviewer gives you a one-paragraph deal prompt ("TargetCo does $50M of EBITDA, trades at 8x, you can lever it 3.5x, assume 10% EBITDA growth..."), leaves the room, and comes back expecting sources and uses, a five-year build, debt paydown, an exit, and an IRR and MOIC — plus your narration of what you did and why.
Most candidates fail this exercise for the wrong reason. They treat it as a math test and spend 28 minutes chasing a perfect model, then mumble through the explanation. It is not a math test. It is a judgment-under-time-pressure test: can you structure a deal, make defensible simplifications, finish on time, and tell the story? The framework below is designed around that reality — every step exists to keep you moving.
The moment the interviewer leaves, write the skeleton first: "S&U → EBITDA build → debt schedule → exit → returns." Candidates who start calculating immediately almost always run out of time. Candidates who spend the first 90 seconds on structure almost always finish.
The 7-step framework
Every paper LBO follows the same seven steps, in the same order. The order is not optional — each step feeds the next, so skipping one breaks the chain. Memorize the sequence cold before you worry about any individual calculation.
Step 1 — Parse the prompt and list the inputs (2 min)
Read the prompt twice. Underline every number and write a clean input list: current EBITDA, entry multiple, leverage multiple, growth rate, hold period, exit multiple, fees. If a number isn't given, note the assumption you'll make ("exit at same multiple as entry" is the standard default). This list is your single source of truth for the next 28 minutes — everything you compute traces back to it.
Step 2 — Build sources and uses (5 min)
Sources and uses is the accounting identity of the deal: where the money comes from = where the money goes. Uses: purchase of equity (entry EV minus existing debt plus cash), repayment of existing debt, transaction fees. Sources: new debt, sponsor equity (your check — the number everything else is measured against), and any cash on the balance sheet. If you want the full mechanics, our sources and uses explainer walks through it line by line.
Step 3 — Entry enterprise value (1 min)
Entry EV = current EBITDA × entry multiple. That's it. This number anchors the whole model, so compute it first and circle it.
Step 4 — Project five years of EBITDA and free cash flow (8 min)
Grow EBITDA each year by the given rate, then convert to free cash flow: EBITDA minus capex, minus change in working capital, minus cash interest, minus cash taxes. In a paper setting, simplify aggressively — most prompts effectively give you FCF as a round number or let you approximate it as a percentage of EBITDA. Five rows, one per year, that's the build.
Step 5 — The debt schedule (5 min)
Start with entry debt, subtract each year's FCF (that's the paydown — free cash flow retires debt), add interest accrual if the prompt requires it. Ending debt at year 5 is the number that determines your exit equity. This is where most arithmetic errors live, so keep it to one column: beginning balance, minus paydown, equals ending balance.
Step 6 — Exit enterprise value and equity value (3 min)
Exit EV = year-5 EBITDA × exit multiple. Exit equity = exit EV − remaining debt + cash. This is the "cash out" side of your return math.
Step 7 — IRR, MOIC, and the sanity check (4 min)
MOIC = exit equity ÷ sponsor equity invested. IRR ≈ MOIC1/5 − 1 for a five-year hold. Then the sanity check: does the answer look like a real deal? A clean prompt should land you in the low-to-mid 20s IRR and a 2.5x–3.0x MOIC. If you get 8% or 60%, re-check the debt schedule before you defend the number.
At each step, the interviewer is checking one thing: Step 2 — do sources equal uses? Step 4 — is FCF directionally right? Step 5 — did debt actually get paid down? Step 7 — do the returns make sense? Get the structure right and the arithmetic approximately right, and you pass. Get the arithmetic perfect but the structure wrong, and you fail.
Your 30-minute time budget
Time management is the actual skill being tested. Here's the budget we drill into every rep — it leaves you 5 minutes to narrate, which is where offers are won:
| Minutes | Block | What "done" looks like |
|---|---|---|
| 0–2 | Parse + skeleton | Input list written; 7-step skeleton on the page |
| 2–7 | Sources & uses | Sources = uses; sponsor equity check circled |
| 7–15 | EBITDA + FCF build | Five rows of EBITDA and FCF |
| 15–20 | Debt schedule | Year-5 remaining debt computed |
| 20–24 | Exit + returns | Exit equity, MOIC, IRR on the page |
| 24–26 | Sanity check | Returns in the 20s; arithmetic re-checked |
| 26–30 | Narration | 60-second walkthrough rehearsed once |
The hard rule: never let any block overrun by more than 2 minutes. If the debt schedule is fighting you at minute 20, move on with an estimate and come back if time remains. An interviewer would rather hear "I approximated the paydown at $30M a year" than watch you perfect a schedule while the returns section sits blank.
Worked example: 30 minutes on paper
Here's the full framework applied to a typical prompt. Follow along with a pen — this is the exact pace the time budget assumes.
The prompt
30 minTargetCo generates $50M of EBITDA. You can acquire it at an 8.0x entry multiple. The deal can support 3.5x leverage. Assume EBITDA grows 10% annually, the hold period is 5 years, and you exit at the same 8.0x multiple. Transaction fees are 2% of enterprise value. TargetCo has $60M of existing debt and $20M of cash. Approximate annual free cash flow at $35M.
Minutes 0–2 — inputs. EBITDA $50M · entry 8x · leverage 3.5x · growth 10% · hold 5 yrs · exit 8x · fees 2% of EV · existing debt $60M · cash $20M · FCF $35M/yr.
Minutes 2–7 — sources and uses. Entry EV = 8 × $50M = $400M. Uses: purchase of equity ($400M − $60M debt + $20M cash = $360M) + repay existing debt ($60M) + fees (2% × $400M = $8M) = $428M. Sources: new debt (3.5 × $50M = $175M) + cash on balance sheet ($20M) + sponsor equity = $428M − $175M − $20M = $233M. Sources = uses ✓. (We use a slightly heavier equity check here than the 3.5x leverage alone would suggest because the fees and refinanced debt also need funding — this is the step candidates most often get wrong, and it's exactly why our paper LBO mistakes guide leads with it.)
Minutes 7–15 — the five-year build. EBITDA grows 10% a year: $50M → $55M → $60.5M → $66.6M → $73.3M → $80.6M in year 5. (Shortcut: 1.15 ≈ 1.61, so year-5 EBITDA ≈ $50M × 1.61 = $80.5M. One multiplication instead of five.) FCF is given at $35M/year — write all five rows, done.
Minutes 15–20 — debt schedule. Entry debt $175M, pay down $35M/year: $175M → $140M → $105M → $70M → $35M → $0M at exit. Clean paydown, debt fully retired. One column, five subtractions.
Minutes 20–24 — exit and returns. Exit EV = 8 × $80.6M = $644.8M. Exit equity = $644.8M − $0 debt = $644.8M. MOIC = $644.8M ÷ $233M = 2.77x. IRR = 2.771/5 − 1 ≈ 22.6%.
MOIC = 644.8 / 233 ≈ 2.77x · IRR = 2.770.2 − 1 ≈ 22.6%
Minutes 24–26 — sanity check. 22.6% IRR, 2.77x MOIC over five years: squarely in the "good buyout" zone. The debt paid itself off, the exit multiple equals the entry multiple (no heroic multiple expansion assumed), and every number traces back to the input list. This is a pass.
| Line | Entry | Year 5 / Exit |
|---|---|---|
| EBITDA | $50.0M | $80.6M |
| EV (8.0x) | $400.0M | $644.8M |
| Debt | $175.0M | $0.0M |
| Equity value | $233.0M invested | $644.8M |
| Returns | — | 2.77x MOIC · ~22.6% IRR |
Free Paper LBO Drill
A full 30-minute timed paper LBO with a diagnostic answer key — the exact format above, ready to run.
FreeShortcuts that save 10 minutes
The candidates who finish comfortably aren't faster at arithmetic — they do less of it. These are the simplifications professionals use:
Compound in one step. Memorize 1.15 ≈ 1.61, 1.085 ≈ 1.47, 1.125 ≈ 1.76. Year-5 EBITDA is one multiplication, not five.
IRR from MOIC anchors. Over five years: 2.0x ≈ 15%, 2.5x ≈ 20%, 3.0x ≈ 25%. If your MOIC is 2.77x, you're between 20% and 25% — say "~23%" and move on. Nobody ever lost an offer over 22.6% vs. 23%.
Round everything. $80.6M becomes $80M. $644.8M becomes $645M. Two significant figures is plenty — the interviewer is checking structure, not your third decimal.
Skip the interest schedule. Unless the prompt gives you an interest rate and demands it, treat FCF as already after interest (prompts that hand you an FCF number have done this for you). Building a full interest calc by hand is the single biggest time sink in the exercise.
Assume exit = entry multiple. Unless the prompt says otherwise, exiting at the entry multiple is the defensible default. It also removes an entire judgment call from your 30 minutes.
State your simplifications out loud as you make them: "I'm going to treat FCF as after interest since the prompt gives it to me directly." Announced assumptions sound like judgment. Silent ones look like gaps.
What the interviewer is scoring
Strip away the finance and the rubric has four lines: structure (did you follow the 7 steps in order?), mechanics (do sources equal uses? did debt go down?), judgment (are your simplifications defensible?), and communication (can you narrate it in 60 seconds?). Arithmetic accuracy is table stakes — it's necessary but it doesn't differentiate.
The most common failure mode isn't a wrong number. It's a candidate who built a decent model but can't explain why leverage helps returns, or who froze for six minutes on the debt schedule and never got to the exit. The framework above is weighted accordingly: the time budget protects your narration minutes, and the shortcuts protect you from arithmetic rabbit holes.
If you want to see the failure modes up close, our paper LBO practice problems include five timed drills with full solutions — and the worked paper LBO example walkthrough shows the same framework applied line by line to a complete deal.
After the model: the 60-second narration
When the interviewer returns, you get roughly a minute before the questions start. Use the same skeleton every time — entry, operations, exit, returns:
The 60-second narration script
~60 sec"We buy TargetCo for $400M at 8x its $50M EBITDA. Sources and uses balance at $428M — $175M of debt at 3.5x leverage, $20M of cash on the balance sheet, and a $233M equity check. Over five years EBITDA compounds at 10% to about $81M, and $35M of annual free cash flow fully retires the debt. We exit at the same 8x multiple for roughly $645M of enterprise value, which is all equity at that point. That gives us a 2.8x MOIC and about a 23% IRR — a solid buyout return driven by deleveraging and EBITDA growth, with no multiple expansion assumed."
Then stop talking. The narration's job is to show command of the deal, not to pre-empt every question. The questions that follow — "what if growth is only 5%?", "what breaks the thesis?" — are where you prove you understand the model rather than just built it. Short answers, numbers first, then the reasoning.
Free Paper LBO Drill
A full 30-minute timed paper LBO with a diagnostic answer key — run this framework against the clock before your interview.
FreeFrequently asked questions
What is a paper LBO?
A paper LBO is a leveraged buyout model built by hand — pen, paper, and a calculator — in about 30 minutes, usually during a private equity interview. You take a deal prompt (EBITDA, entry multiple, leverage, growth), build sources and uses, project five years of cash flows, pay down debt, exit, and compute IRR and MOIC. It tests whether you understand the mechanics of an LBO, not whether you can operate Excel.
How long does a paper LBO take in an interview?
Typically 30 minutes, sometimes 20. The interviewer hands you a one-paragraph deal prompt and expects a full answer — sources and uses, debt schedule, exit, IRR and MOIC — within the time limit, often with 5 minutes at the end to narrate your model. The time budget matters as much as the math: candidates who spend 25 minutes on the build and 5 on the story beat candidates with a perfect model and no narration.
What are the steps of a paper LBO?
The seven steps are: (1) parse the prompt and list every input, (2) build sources and uses, (3) compute entry enterprise value, (4) project five years of EBITDA and free cash flow, (5) build the debt schedule, (6) compute exit enterprise value and equity value, (7) calculate IRR and MOIC and sanity-check everything. The order is fixed — each step feeds the next, so skipping one breaks the chain.
What IRR should a paper LBO produce?
A well-structured practice prompt usually lands in the low-to-mid 20s — roughly a 2.5x to 3.0x MOIC over five years. If your answer comes out at 8% or 60%, you almost certainly made an arithmetic error rather than discovering a terrible or miraculous deal. Interview prompts are calibrated so the math works cleanly; an implausible answer is a signal to re-check your work, not a bold insight.
Can you use a calculator in a paper LBO interview?
Usually yes — a basic calculator is standard, and prompts are designed so the arithmetic stays round. What you typically cannot use is a laptop or a phone. The skill being tested is judgment under time pressure: choosing what to simplify, keeping the structure right, and narrating assumptions — not mental arithmetic. Round aggressively and keep every number to two significant figures.