Paper LBO Example: A Full Walkthrough with Answer Key

This paper LBO example is the closest thing to a cheat code for PE interviews: one fully worked buyout, from the entry multiple to the exit check, with every number shown. No Excel, no three-statement model — just the arithmetic you'd do on a whiteboard or a single sheet of paper while an interviewer watches. Below, we take a fictional $120M-revenue company private at 8.0x EBITDA, lever it at 55%, hold it for five years, and exit at 9.0x — landing at a 3.85x MoIC and ~31% IRR. If you can narrate this walkthrough cold, you can handle any paper LBO an interviewer throws at you.

The company here is entirely fictional and the numbers are illustrative — that's the point. A paper LBO is not about the company; it's a test of structure, leverage math, and judgment. Work this example until the four steps below feel like muscle memory, then try it under time pressure with our free paper LBO drill.

The setup

Here's the prompt, written the way an interviewer would actually give it to you — verbally, with round numbers, watching to see whether you write them down in an organized way:

Before touching any math, convert the prompt into a clean assumptions box. This is the single highest-leverage habit in a paper LBO: it forces you to confirm the inputs, and it gives the interviewer something to follow. For this paper LBO example, the box looks like this:

Deal assumptions

Input	Value
LTM revenue	$120.0M
LTM EBITDA	$30.0M
EBITDA margin	25%
Revenue growth	10% / year
Entry multiple	8.0x EBITDA
Entry enterprise value	$240.0M
Debt financing	55% of EV
Interest rate	7.0%
Transaction fees	2.0% of EV
Hold period	5 years
Exit multiple	9.0x EBITDA

Step 1 — Sources & uses

Every LBO starts the same way: figure out what the deal costs in total, then figure out who pays for it. Entry enterprise value is 8.0x the $30M of LTM EBITDA, so $240.0M. Add transaction fees of 2% of EV — $4.8M — and the total price tag is $244.8M.

Debt covers 55% of the $240M EV: $132.0M at 7%. The sponsor's equity check is whatever is left:

Sources & uses ($M)

	Amount
Sources
Debt (55% of EV)	$132.0
Sponsor equity (plug)	$112.8
Total sources	$244.8
Uses
Purchase of enterprise value	$240.0
Transaction fees	$4.8
Total uses	$244.8

Two numbers from this step anchor everything that follows: the $112.8M equity check (the denominator of your MoIC) and the $132.0M of starting debt (the balance you'll pay down in Step 3). Candidates who rush this step almost always botch the equity check — usually by forgetting fees — and then every return number downstream is wrong.

Step 2 — Project the five years

This is where the paper LBO earns its name. A full model would build revenue line by line, but on paper you project EBITDA directly: grow revenue 10% a year, hold the 25% margin flat. That's it. Saying "I'm holding margins flat for simplicity" is a feature, not a weakness — it shows you know which assumptions matter and which are noise at this level of precision.

Five-year EBITDA build ($M)

Year	Revenue	EBITDA	Margin
0 (LTM)	$120.0	$30.0	25%
1	$132.0	$33.0	25%
2	$145.2	$36.3	25%
3	$159.7	$39.9	25%
4	$175.7	$43.9	25%
5	$193.3	$48.3	25%

The two numbers that matter for the rest of the walkthrough: Year 5 EBITDA of $48.3M (drives the exit value) and the revenue path (drives capex and working capital in the debt schedule). Everything else in this table is scaffolding — don't narrate every cell to the interviewer or you'll burn half your time here.

Step 3 — Debt paydown

Now convert EBITDA into cash available to repay debt. The simplified free-cash-flow definition for a paper LBO:

FCF = EBITDA − interest − capex − change in working capital, with 100% of FCF swept to debt paydown and taxes ignored (stated up front).

Our assumptions, kept deliberately round: capex at 4% of revenue each year, and working capital investment at 8% of each year's revenue growth (a growing business ties up cash). Year 1 worked fully, so you can see the mechanics:

Year 1: $33.0M EBITDA − $9.2M interest ($132.0M × 7%) − $5.3M capex (4% × $132.0M revenue) − $1.0M working capital (8% × $12.0M revenue growth) = $17.5M of FCF, all of it to debt. Ending debt: $132.0M − $17.5M = $114.5M.

Repeat the same arithmetic for Years 2–5. Interest falls each year as the balance shrinks, so paydown accelerates — that's the deleveraging engine of the whole deal:

Figures rounded to one decimal; rows may not foot exactly. Debt is fully repaid during Year 5 (a ~$0.4M excess cash stub is disregarded).

The pattern is the lesson: FCF grows from $17.5M to $36.6M because EBITDA rises and interest falls as the balance amortizes. By exit, the full $132.0M of entry debt is gone. In an interview, point at this dynamic explicitly — "paydown accelerates because interest expense falls as the balance shrinks" — it's the one sentence that separates candidates who understand leverage from candidates who just did arithmetic.

Step 4 — Exit and returns

The exit is the mirror image of entry. Year 5 EBITDA of $48.3M at a 9.0x exit multiple gives an exit enterprise value of $434.8M. With zero debt remaining, the equity value at exit is the full $434.8M.

Now the two return metrics, both measured against the $112.8M equity check from Step 1:

• MoIC = $434.8M ÷ $112.8M = 3.85x. Straightforward division — the one number you should never get wrong.
• IRR ≈ 31%. Here's the honest method: solve (1 + r)⁵ = 3.85 by bracketing. Try 30%: 1.30⁵ = 3.71 — too low. Try 31%: 1.31⁵ = 3.86 — essentially there. So IRR ≈ 31%. In the interview, do exactly this out loud: pick a round rate, test it, adjust. Interviewers would much rather watch you bracket to 31% than watch you announce a false-precision "30.98%."

So this paper LBO example lands at 3.85x MoIC and ~31% IRR — a strong result driven by three levers: buying at 8.0x, fully delevering over the hold, and exiting at 9.0x with a bigger, more profitable company. If you want to go deeper on how the two metrics relate, read our MOIC vs IRR breakdown.

How to narrate this in the interview

Knowing the math is half the test; the other half is the talk track. The interviewer is evaluating whether you'd sound credible walking a partner through a deal. Here's a ~3-minute narration of this paper LBO example, beat by beat:

1. 0:00–0:20 — State the deal back. "$120M revenue, $30M EBITDA at 25% margins, growing 10%. We buy at 8.0x — $240M EV — with 55% debt at 7%, five-year hold, exit at 9.0x. I'm ignoring taxes and sweeping all free cash flow to debt." This proves you captured the prompt and sets your assumptions on the record.
2. 0:20–1:00 — Sources & uses. "$240M EV plus $4.8M of fees is $244.8M all-in. $132M of debt, so the equity check is $112.8M." Say the equity check twice — it's your MoIC denominator and interviewers notice when you anchor on it.
3. 1:00–1:50 — The build, fast. "Revenue compounds at 10% to $193M by Year 5; at a flat 25% margin that's $48.3M of EBITDA." Do not narrate every year. One sentence for the whole build.
4. 1:50–2:20 — Debt. "FCF is EBITDA less interest, capex at 4% of revenue, and working capital at 8% of growth. It runs $17.5M in Year 1 and accelerates to $36.6M as interest falls — the debt is fully repaid by exit." Name the acceleration dynamic; it's the insight, not the arithmetic.
5. 2:20–2:50 — Exit and returns. "$48.3M at 9.0x is $434.8M of EV, zero debt left, so equity is worth $434.8M on a $112.8M check — 3.85x. Bracketing the IRR: 1.31 to the fifth is about 3.86, so roughly 31%."
6. 2:50–3:00 — Levers. "The return comes from three things: buying at 8.0x, full deleveraging, and exiting at 9.0x on a bigger EBITDA base. If growth slipped to 5%, we'd be closer to a 2.9x and mid-20s IRR." Ending on a sensitivity shows judgment — it tells the interviewer you know which assumptions carry the answer.

Where candidates ramble: re-deriving the revenue line year by year out loud, narrating every table cell, apologizing for mental math, and restating the prompt instead of answering it. The talk track above avoids all four — it's the version to rehearse until it's automatic.

Variations interviewers throw at you

Once you've nailed the base case, the interviewer changes one input to see if your framework holds. In this paper LBO example, here's how the four most common twists play out — each recomputed, not hand-waved:

"What if leverage is 65% instead of 55%?"

Debt rises to $156.0M and the equity check falls to $88.8M. Higher interest drags on free cash flow, so paydown is slower — $33.3M of debt is still outstanding at exit. Equity value becomes $434.8M − $33.3M = $401.5M, for a 4.52x MoIC and ~35% IRR. Returns go up because the equity base shrank faster than the interest drag hurt — but flag the risk out loud: at 65% leverage there's less room for error if EBITDA misses, and the deal no longer fully delevers.

"What if growth is only 5%?"

Year 5 EBITDA lands at $38.3M instead of $48.3M, so the 9.0x exit is worth only $344.6M — and slower FCF leaves $21.1M of debt outstanding. Equity value is $323.5M on the same $112.8M check: 2.87x MoIC, ~23.5% IRR. Still a passable deal, but it shows why growth is the highest-leverage assumption in the model alongside the entry multiple — it hits both the exit value and the paydown capacity at once.

"What if you do a dividend recap in Year 3?"

At the end of Year 3, debt is down to $67.2M against $39.9M of EBITDA — roughly 1.7x levered. Recapitalizing back to ~4.0x EBITDA means borrowing ~$159.7M total and dividending the ~$92.5M difference to equity holders in Year 3. MoIC barely moves (you've just pulled forward value, not created it), but IRR jumps meaningfully because ~$92.5M arrives two years early. The interviewer point to land: recaps juice IRR through timing, not through value creation — say that sentence verbatim and you'll sound like you've seen a real deal.

"What breaks this deal?"

Overpay on entry and suffer multiple contraction: buy at 10.0x ($300M EV) and exit at 7.0x. The equity check rises to $141.0M (55% debt on the bigger EV, plus fees), exit EV is only $338.2M, and $45.9M of debt remains — equity value $292.3M, or 2.07x MoIC and ~15.7% IRR, below a typical 20% hurdle. That's the anatomy of a broken LBO: entry-multiple expansion in reverse, working against you on both ends. Interviewers ask this to check whether you understand that returns are made at entry, not at exit.

Want these twists as timed reps instead of reading? Our paper LBO practice problems include sensitivity-style prompts with full answer keys.

Frequently asked questions

How long does a paper LBO take in a PE interview?

Most paper LBOs are designed for 20 to 30 minutes of pen-and-paper work, plus 5 to 10 minutes of walking the interviewer through your answer. That is the whole test: can you hold the structure, do the arithmetic, and narrate the logic under time pressure. Our free drill is timed at 30 minutes to match that format exactly.

Do PE firms still use paper LBOs?

Yes. Most large-cap, mid-market, and growth-equity processes still include a paper LBO or a short modeling case, especially for analyst and associate roles. The format survives because it tests three things at once: structured thinking, comfort with leverage math, and the ability to communicate a deal thesis out loud.

What's the difference between a paper LBO and a full LBO model?

A paper LBO is a simplified, pen-and-paper version: you project EBITDA directly, assume free cash flow pays down debt, and solve for equity value at exit. A full LBO model builds the three financial statements, schedules debt tranches, and models taxes, working capital, and purchase accounting in detail. The paper version tests judgment and fluency; the full model tests Excel stamina.

What IRR should I target in my answer?

Don't force a number — derive it. Mid-market buyouts typically target a low-to-mid-20s IRR and a 2.5x+ MoIC, but what matters in an interview is showing which levers drive your answer. In this paper LBO example, the ~31% IRR comes from three things: buying at 8.0x, delevering fully over five years, and exiting at 9.0x. Name those levers and your answer holds up even if an assumption changes.

Can I ignore taxes in a paper LBO?

In most interviews, yes — as long as you say so out loud. Stating 'I'm ignoring taxes and assuming 100% of free cash flow pays down debt' shows the interviewer you know the simplification you're making. In a real model you'd add a tax shield and D&A; on paper, the simplification keeps the arithmetic testable in 30 minutes.