7 Paper LBO Mistakes That Fail Candidates (and How to Fix Each One)

Why the failures rhyme

Every paper LBO mistake that fails a candidate comes from the same root cause: the model is a chain, and one broken link corrupts everything downstream. Sources and uses feed the equity check; the equity check feeds the returns; the debt schedule feeds the exit equity. Interviewers know this, which is why they don't grade your model like a homework assignment — they probe the links. The seven mistakes below are the ones that break the chain most often, in the order candidates usually make them.

Work through them before your next rep. Each one takes sixty seconds to internalize and saves you from the exact failure mode it describes.

Mistake 1: Confusing EV with the equity check

What it looks like: the candidate computes entry EV at $400M and then uses $400M as the denominator for MOIC — as if the sponsor wrote a $400M check. In reality the sponsor's check was $233M after $175M of debt and $20M of balance-sheet cash funded the rest.

Why it fails you: this single error understates the MOIC from 2.8x to 1.6x and tells the interviewer you don't understand what leverage does. The entire economic logic of an LBO — amplifying equity returns with debt — is invisible to you. It's the most expensive mistake on this list because it corrupts the headline answer.

The fix: never compute a return until you've circled the equity check from sources and uses. Say it out loud: "My equity invested is $233M — that's my denominator for everything." If you want the full mechanics of getting that number right, our sources and uses explainer builds it line by line.

Mistake 2: Forgetting cash and existing debt

What it looks like: the prompt says TargetCo has $60M of debt and $20M of cash, and the candidate's sources and uses quietly omits both — buying the equity for the full $400M EV and funding it with $400M of new capital.

Why it fails you: enterprise value is not what you pay for the equity. You pay EV minus debt plus cash — that's the bridge every buyer actually crosses. Omitting it overstates the purchase price by $40M in this example, which ripples into the equity check, the leverage ratio, and the returns. Interviewers include cash and debt in the prompt specifically to test whether you know the bridge exists.

The fix: the first thing you write after entry EV is the bridge: Equity purchase price = EV − existing debt + cash. $400M − $60M + $20M = $360M. Then the old debt gets repaid as a use, and the cash becomes a source. Every dollar accounted for, both sides.

Mistake 3: Ignoring transaction fees

What it looks like: the prompt says "transaction fees are 2% of enterprise value" and the candidate nods, writes it down, and never puts it in the model. Sources and uses come out unbalanced by exactly $8M, and the candidate "plugs" the difference into sponsor equity without noticing.

Why it fails you: fees are a use of cash — real money that leaves the deal on day one and earns no return. Ignoring them understates the equity check, which overstates the MOIC. Worse, an interviewer who watches you force-balance sources and uses sees someone papering over a gap instead of finding it.

The fix: fees go in uses, always: 2% × $400M = $8M. Then check the balance: uses $428M vs. sources $428M. If the two sides differ, the difference is a missing line item, not a rounding error — find it before you move on.

Mistake 4: Paying down debt with the wrong cash flow

What it looks like: the candidate subtracts EBITDA — not free cash flow — from the debt balance each year. $175M of debt "paid down" by $50M of EBITDA annually is gone in under four years, and the model shows a miraculous deleveraging that no real company could achieve.

Why it fails you: EBITDA is not cash available to lenders. Capex, working capital, interest, and taxes all come out before a dollar can retire debt. Using EBITDA as paydown double-counts the money — and it tells the interviewer your mental model of cash flow stops at the most quoted line on the page.

The fix: debt paydown comes from free cash flow only: EBITDA minus capex, minus change in working capital, minus cash interest, minus cash taxes. In most paper prompts FCF is given directly (here: $35M/year) precisely so you don't have to derive it — the test is whether you reach for the right line.

Mistake 5: Forgetting debt at exit

What it looks like: the candidate computes exit EV at $645M and calls it the exit equity — forgetting the $35M of debt still outstanding in a variant where paydown was slower. Exit equity is overstated, MOIC is overstated, and the whole return story is fiction.

Why it fails you: equity value is what's left after lenders are paid. This is the exit-side mirror of Mistake 1: at entry you forgot that debt reduces the purchase price; at exit you forget that remaining debt reduces what the sponsor takes home. Interviewers test both directions deliberately.

The fix: write the exit bridge every time, even when remaining debt is zero: Exit equity = exit EV − remaining debt + cash. In our 30-minute framework example the debt fully amortizes, so the bridge is $645M − $0 = $645M — but writing it takes five seconds and proves you didn't forget the step.

Mistake 6: Computing returns on enterprise value

What it looks like: a subtler version of Mistake 1. The candidate gets the equity check right in sources and uses, then — under time pressure — divides exit equity by entry enterprise value when computing MOIC. $645M ÷ $400M = 1.6x, announced with confidence.

Why it fails you: MOIC is a return on the sponsor's invested capital, not on the deal's total value. The correct math is $645M ÷ $233M = 2.8x. Getting this wrong after getting sources and uses right is especially damaging — it suggests the candidate can follow a template but doesn't understand what the numbers mean. Our MOIC vs IRR guide goes deep on why the denominator is everything.

The fix: ritualize it. Every time you write "MOIC =", first write the two numbers with labels: "exit equity $645M / equity invested $233M". Labeled numbers don't get swapped; bare numbers do.

MOIC = exit equity ÷ equity invested = 645 / 233 ≈ 2.77x
IRR = 2.77^1/5 − 1 ≈ 22.6%

Mistake 7: Building in silence — no narration

What it looks like: the candidate produces a correct model and then, asked to walk through it, says "so... yeah, the IRR is 23%," and stops. Or narrates the arithmetic line by line instead of telling the deal story.

Why it fails you: the paper LBO is a communication test wearing a math costume. Associates spend their days explaining models to partners who haven't built them — the interview is checking whether you can do that. A candidate who can't narrate a model they just built raises the question of whether they understood it at all.

The fix: rehearse the 60-second script from our 30-minute framework: entry, operations, exit, returns — one sentence each. Then stop. Short answers, numbers first, reasoning second. And state your assumptions as you make them during the build, not just at the end; announced assumptions sound like judgment, silent ones look like gaps.

The 90-second self-check

Before the interviewer returns, run this checklist. It catches all seven mistakes in about ninety seconds:

The last line of the checklist is the most important. If your IRR comes out at 8% or 60%, you don't have a bold insight — you have an arithmetic error. Prompts are calibrated so the math works cleanly. An implausible answer is a signal to re-check, not a thesis to defend.

Frequently asked questions

What is the most common paper LBO mistake?

The most common mistake is confusing enterprise value with the equity check — candidates divide exit equity by entry EV instead of by the sponsor's actual equity invested. This understates the MOIC dramatically (e.g., reporting 1.6x instead of 2.8x) and signals you don't understand what leverage does. Always isolate the equity check from sources and uses first, then compute returns against that number alone.

Do sources and uses have to balance in a paper LBO?

Yes — sources must equal uses, always. It is the accounting identity of the deal: every dollar that funds the transaction must be accounted for on both sides. Interviewers check this first because an unbalanced sources-and-uses means the equity check is wrong, which means every return number downstream is wrong. If yours don't balance, stop and find the gap before building anything else.

How do you calculate IRR in a paper LBO?

Compute MOIC first (exit equity divided by equity invested), then use IRR = MOIC^(1/years) − 1 for a standard single-investment, single-exit shape. For a five-year hold, memorize the anchors: 2.0x ≈ 15%, 2.5x ≈ 20%, 3.0x ≈ 25%. Interpolating between anchors is accurate enough for an interview — nobody expects more than two significant figures on paper.

Should you assume the exit multiple equals the entry multiple?

Yes, unless the prompt says otherwise. Exiting at the entry multiple is the defensible default — it assumes no multiple expansion, which keeps your return story honest and removes a judgment call from a timed exercise. If you do assume expansion or contraction, state the reason explicitly (e.g., margin improvement justifying a higher multiple), because the interviewer will ask.

How can I practice paper LBOs under time pressure?

Run full 30-minute timed reps with a diagnostic answer key, not untimed study. The failure modes are time management and narration, which only appear against the clock. Do at least three timed reps covering different deal shapes — a standard 5-year hold, a dividend recap, and a downside case — and narrate each one out loud in 60 seconds afterward.