Paper LBO Example: A Step-by-Step Walkthrough

A paper LBO example is the single most-asked technical drill in a private equity interview, and getting it right in 5 to 10 minutes with nothing but a pen separates the candidates who get a callback from the ones who do not. This walkthrough shows you exactly how to do it: the standard prompt format, the five mental math steps, the MOIC-to-IRR shortcut table every candidate must memorize, two full worked examples (a 5-year hold and a 3-year hold anchored to a real 2024 to 2026 buyout), the five interviewer traps that filter weak candidates, and references back to the primary sources interviewers themselves quote (Federal Reserve H.15, PitchBook LCD, the LSTA, and recent SEC 8-K filings on closed PE transactions). When you finish, you will have a repeatable structure you can rehearse the night before any megafund, upper-middle-market, or growth equity round.

The companion guide to this drill is our LBO model step-by-step guide, which covers the full Excel build. The paper LBO is the mental version of that same model, compressed into round numbers you can compute in your head while the interviewer watches you write.

What Is a Paper LBO (And Why PE Interviewers Use It)

A paper LBO is a leveraged buyout calculation done with a pen, scratch paper, and round numbers, with no spreadsheet, no calculator, and a 5 to 10 minute window. The interviewer hands you a prompt with five inputs (revenue, EBITDA margin, entry multiple, leverage, hold period) and asks you to back out the internal rate of return on the sponsor equity check. The output is one number: the IRR, usually within 3 percentage points of what the interviewer has in mind.

The drill exists because every step of an LBO model is a compounding decision (entry multiple, debt sizing, EBITDA growth, debt paydown, exit multiple) and getting any one of them wrong by a turn pushes IRR by 5 to 10 points. Interviewers use the paper LBO to verify three things at once: (1) you understand the four value-creation levers of a buyout, (2) you can do the mental math fast enough to run a quick sanity check on a real deal model, and (3) you can talk through the structure clearly under pressure. Wall Street Oasis catalogues hundreds of paper LBO prompts and answer attempts in its private equity forum, and the consistent feedback from candidates who got cut is the same: they nailed the arithmetic but lost the structure or missed a lever.

Megafunds (KKR, Blackstone, Apollo, Carlyle, Bain Capital, TPG, Advent, CVC, Warburg Pincus), upper-middle-market sponsors (Thoma Bravo, Hellman and Friedman, Vista, Clearlake, Roark, Audax, Genstar, GTCR), and growth equity shops (General Atlantic, Insight Partners, Summit, TA Associates) all run the paper LBO at the first technical round. Recruiters at Henkel Search Partners, Amity Search Partners, CPI, and Bellcast Partners brief every PE candidate they place on the drill before the first round.

The drill mirrors the actual mental math an associate runs in a sponsor’s Monday morning pipeline meeting when a banker sends over a new teaser. The deal team reads the teaser, computes a paper LBO in their heads in under two minutes, and decides whether to take the next meeting. The paper LBO is not an academic exercise; it is the rough cut every sponsor performs before they invest the deal team’s time.

The Standard Paper LBO Prompt: What You Get and What You Have to Output

The standard interview prompt gives you five inputs and asks for one output. Here is the canonical version:

“A sponsor is buying a company with $100 million of revenue, a 20 percent EBITDA margin, growing revenue at 5 percent per year. Entry multiple is 10x EBITDA, leverage is 6x EBITDA at a blended cost of 10 percent, hold period is 5 years, exit multiple equal to entry. What is the IRR to the sponsor?”

From that prompt you have to produce, in order, the entry enterprise value, the sources and uses (debt and equity check), the 5-year EBITDA build, the levered free cash flow each year, the ending debt balance, the exit enterprise value, the exit equity to sponsor, the MOIC, and the IRR. That is nine derived numbers from five inputs, all done in your head with a pen.

The interviewer is not testing exact arithmetic. They are testing whether you (a) lay out the five steps in clean sequence, (b) commit to round numbers fast, (c) get an IRR within 3 points of theirs, and (d) handle the inevitable follow-up (“now what if we add a $30M tuck-in at year 2?”) without restarting. The Roadtoshow PE recruiting timeline explicitly flags the paper LBO as the gating step between resume screen and case study at step 4 of their recruiting process map.

Practice the prompt format until you can read it aloud and immediately write down the five inputs in a standard grid: revenue, EBITDA, entry multiple, leverage, hold. The Wall Street Prep paper LBO tutorial uses an identical grid; Street of Walls opens with the same five-line setup. Adopt one and stick with it.

Step 1: Read the Prompt and Write Down the Entry Assumptions

Take 30 seconds. Write down the five inputs in a five-line grid before you do any math. The single biggest unforced error candidates make is starting the EBITDA calculation while the interviewer is still talking, then having to back up when they add a sixth detail at the end.

For the standard prompt above, the grid looks like this:

• Revenue: $100M, growing 5 percent per year
• EBITDA margin: 20 percent (flat)
• Entry multiple: 10x EBITDA
• Leverage: 6x EBITDA, 10 percent blended interest
• Hold: 5 years, exit multiple = entry multiple = 10x

From the grid, compute starting EBITDA: 20 percent of $100M is $20M. Write it down. That single number anchors everything downstream (entry EV, debt sizing, exit EV) so getting it right and visible saves you from a cascade of arithmetic errors. The Growth Equity Interview Guide paper LBO walkthrough explicitly recommends boxing the starting EBITDA at the top of your scratch paper for this reason.

Step 2: Build the Sources and Uses Table

Multiply entry multiple by starting EBITDA to get entry enterprise value, then split EV into debt and equity. For our prompt: 10x times $20M equals $200M entry EV. At 6x leverage on $20M, debt is $120M. Sponsor equity check is the remainder: $200M minus $120M equals $80M. You should be able to do this in 20 seconds.

Write the sources and uses block on the page:

• Uses: $200M purchase price (entry EV)
• Sources: $120M debt + $80M sponsor equity = $200M
• Leverage check: $120M / $20M = 6.0x EBITDA (matches prompt)

The 6.0x leverage figure ties back to actual market data. Per PitchBook LCD’s Leveraged Loan hub, sponsor-backed buyouts in 2024 and 2025 averaged 5.5x to 6.5x total leverage on the broadly syndicated loan market, with direct lending deals running slightly higher. The PitchBook 2025 private credit roundup notes that direct lending buyout volume reached the strongest run-rate since 2022, with LBOs the dominant use of proceeds. That is why most paper LBO prompts use 6x as the assumption: it is the market default.

The 10 percent blended interest cost ties back to the Federal Reserve and LSTA data sources. As of mid-2026, three-month SOFR per the New York Fed SOFR reference rate page sits in the mid-4 to low-5 percent range, and the Federal Reserve H.15 Selected Interest Rates release publishes the official daily SOFR fixing. A typical Term Loan B priced at SOFR plus 400 basis points implies a coupon in the high single digits to low double digits; second lien or unitranche tightens that further. Rounding to 10 percent for paper LBO purposes is the standard convention. The Loan Syndications and Trading Association maintains the Morningstar / LSTA Leveraged Loan Index, which is the institutional benchmark interviewers will reference if they push on TLB pricing.

Step 3: Project EBITDA Year-by-Year (Mental Math Method)

Compound starting EBITDA at the assumed annual growth rate across the hold years. For 5 percent growth on a flat margin, EBITDA grows in lockstep with revenue. You do not need a calculator; you need a memorized compounding factor.

The 5-year compounding factor for 5 percent growth is 1.276. Most candidates round to 1.28 or just “about 28 percent total growth over 5 years.” Starting EBITDA of $20M times 1.28 equals roughly $25.5M at year 5. Round to $25M for the rest of the calculation. The compounding table below covers the growth rates that show up in 95 percent of prompts:

Memorize the bolded shortcut: 5 percent growth over 5 years is a 28 percent lift, 10 percent growth over 5 years is a 61 percent lift, and 15 percent growth over 5 years almost exactly doubles the starting number. Those three anchors carry you through most prompts. For the prompt at hand, year 5 EBITDA lands at $25M (rounded from $25.5M).

For interim years, the year-by-year build looks like this:

In the interview, you do not have to write the full table; saying “EBITDA grows from $20M to $25.5M over the five years at 5 percent annual growth” is enough. Macabacus, the financial modeling shortcut library used by most sell-side analysts, publishes the same compounding shortcuts under its modeling reference.

Step 4: Calculate Levered Free Cash Flow Each Year

Levered free cash flow is the cash available after interest, taxes, and capex. For paper LBO purposes, the canonical formula is:

Levered FCF = EBITDA, minus interest, minus taxes (on EBIT after interest), minus capex, minus change in working capital.

For each year, the math goes:

• Start with EBITDA
• Subtract interest: 10 percent times average debt balance
• Subtract D&A: assume 3 to 5 percent of revenue as a paper LBO shortcut
• That gives EBIT
• Subtract cash taxes: 25 percent of EBIT (the 2026 federal plus blended state rate per the IRS Form 1120 corporate filing)
• Add back D&A (it was non-cash)
• Subtract capex (assume capex equals D&A for simplicity)
• That gives unlevered FCF; then since D&A cancels out, the shortcut is FCF = EBITDA, minus interest, minus taxes

Most candidates skip the D&A step entirely because it cancels out when capex equals depreciation. The two-line paper LBO shortcut for FCF is therefore: FCF ~ EBITDA, minus interest, minus 25% taxes on (EBITDA minus interest). That is 75 percent of (EBITDA minus interest), which you can compute in 10 seconds per year.

For year 1 of our example: EBITDA is $21M, interest is 10 percent of $120M starting debt = $12M, so EBITDA minus interest is $9M. Taxes are 25 percent of $9M = $2.25M. FCF is $9M minus $2.25M = $6.75M, round to $7M. Subsequent years grow as EBITDA grows and as the debt balance declines (lowering interest).

The full LFCF schedule for the worked example, computed in your head:

Round aggressively. Cumulative LFCF of $48M is what gets swept against the debt balance. The Wharton MBA finance program teaches this exact LFCF approximation in its corporate finance curriculum, and the Aswath Damodaran NYU Stern corporate finance reference publishes the underlying free cash flow definitions in open-access form.

Step 5: Build the Debt Schedule (100% FCF Sweep)

For paper LBO purposes, assume 100 percent of levered free cash flow is swept against the debt balance each year. Real LBO models include mandatory amortization (typically 1 percent of TLB principal per year) and revolver behavior, but the paper version collapses those into “all FCF pays down debt.” The shortcut is good enough to get you within 3 IRR points of the right answer.

Starting debt is $120M. Cumulative FCF over the 5 years is approximately $48M. Ending debt at exit is $120M minus $48M equals $72M. That is the number you carry forward to the exit equity calculation.

Round ending debt to $72M. In the interview, the shortcut sentence is “cumulative FCF of about $48M pays down $120M of starting debt to $72M at exit, since we sweep 100 percent.” Done in one sentence.

The 100 percent sweep assumption is the most common paper LBO shortcut, and it tracks how direct lenders structure unitranche facilities in real deals. Per the LSTA covenant data, the majority of sponsor-backed direct lending deals in 2025 carried excess cash flow sweeps of 50 to 75 percent stepping down to zero as leverage delevers, but for the paper LBO, “100 percent sweep” is the accepted simplification.

Step 6: Calculate Exit Enterprise Value and Exit Equity

Multiply year 5 EBITDA by the exit multiple to get exit enterprise value, then subtract ending debt to get exit equity. For our prompt: $25.5M year 5 EBITDA times 10x exit multiple equals $255M exit EV. Subtract $72M ending debt equals $183M exit equity.

• Year 5 EBITDA: $25.5M
• Exit multiple: 10.0x (flat to entry)
• Exit enterprise value: $255M
• Less ending debt: $72M
• Exit equity to sponsor: $183M

That is the cash returned to the sponsor’s equity check at exit. The entry equity check was $80M. The MOIC is $183M divided by $80M, which equals 2.29x, round to 2.3x.

The exit multiple is the single assumption that swings IRR the most in a paper LBO. Multiple expansion of one turn (10x to 11x) on $25.5M of year 5 EBITDA adds $25.5M to exit EV, which flows straight to exit equity since debt is unchanged. That single turn lifts MOIC from 2.3x to 2.6x and IRR from 18 percent to 21 percent. Interviewers will often ask you to flex the exit multiple and re-quote IRR to test whether you can hold the rest of the model fixed.

For grounding, when Roark Capital closed its $9.6 billion take-private of Subway in April 2024, the structure was a textbook paper-LBO setup: a mature franchised platform with stable royalty cash flows, leverage in the 5.5x to 6.5x EBITDA range, and an exit thesis built on margin expansion plus modest unit growth. The Federal Reserve H.15 release shows the cost of debt in that vintage was elevated versus the prior cycle, which compressed the IRR math sponsors were willing to underwrite. That is why entry multiples for 2024 and 2025 buyouts compressed from 12x to 14x in 2021 down to 9x to 11x in the current cycle: sponsors needed lower entry multiples to clear the same hurdle rate against higher debt costs.

Step 7: Convert MOIC to IRR (The Shortcut Table You Must Memorize)

Computing IRR by hand from a MOIC and a hold period is the single hardest mental math in any paper LBO. The trick is to skip the math and pattern-match to a memorized table. The formula is IRR = MOIC raised to the power of (1 divided by years), minus 1, but you should never solve that root in your head during an interview. Memorize the table instead.

The bold triad to memorize cold for a 5-year hold: 2.0x equals 15 percent, 2.5x equals 20 percent, 3.0x equals 25 percent. Ninety percent of paper LBO outcomes for a 5-year hold land somewhere on that range, and interviewers expect those three anchors to come out of your mouth in under two seconds when you arrive at the MOIC.

For our worked example, MOIC is 2.3x over 5 years. The 2.0x anchor is 15 percent IRR; the 2.5x anchor is 20 percent IRR. A 2.3x MOIC sits about 60 percent of the way between, so call it 18 percent IRR. That is the answer you give the interviewer.

Two additional shortcuts handle edge cases. First, the Rule of 72: divide 72 by the IRR to get years to double. At 14 percent IRR, money doubles in roughly 5 years. At 24 percent IRR, money doubles in 3 years. Run it backward to back into IRR: if equity doubles in 5 years, the IRR is roughly 14 to 15 percent. Second, the Rule of 115 for tripling: divide 115 by the IRR to get years to triple. At 25 percent IRR, money triples in roughly 5 years. Both rules are taught in the CFI Corporate Finance Institute reference library.

Worked Example 1: 5-Year Hold (JoeCo-Style Mid-Market Buyout)

Here is the entire prompt solved end-to-end. Setup: a sponsor is buying a $100M revenue mid-market services business with a 20 percent EBITDA margin, growing revenue at 5 percent annually. Entry multiple is 10x EBITDA, leverage is 6x EBITDA at a 10 percent blended cost, hold period is 5 years, exit multiple is flat at 10x.

Inputs grid:

• Revenue: $100M, 5% annual growth
• EBITDA: $20M, 20% margin (flat)
• Entry multiple: 10.0x
• Leverage: 6.0x, 10% blended interest
• Hold: 5 years, exit at 10.0x

Sources and uses:

• Entry EV: 10.0x x $20M = $200M
• Debt funded: 6.0x x $20M = $120M
• Sponsor equity check: $200M – $120M = $80M

EBITDA build (5% per year):

• Year 1: $21.0M | Year 2: $22.1M | Year 3: $23.2M | Year 4: $24.3M | Year 5: $25.5M

Cumulative levered FCF over 5 years: approximately $48M (using FCF = 75% of EBITDA-minus-interest each year)

Debt schedule: Starting debt $120M, less $48M cumulative sweep = $72M ending debt

Exit:

• Year 5 EBITDA: $25.5M
• Exit EV: 10.0x x $25.5M = $255M
• Less ending debt: $72M
• Exit equity: $183M

Returns:

• MOIC: $183M / $80M = 2.29x, round to 2.3x
• IRR over 5 years for 2.3x MOIC: approximately 18 percent

That is the full walk. Total time on the page if you have practiced: 5 to 7 minutes. The answer is in the credible range that the Bain Global Private Equity Report shows as the historical median for mid-market buyouts (mid-teens to low-20s gross IRR), so the interviewer will accept 18 percent as a reasonable answer for a flat-multiple, mid-leverage, mid-growth deal. If you wanted to get to a 20 percent plus IRR, you would need either multiple expansion, faster EBITDA growth, or higher leverage.

Wall Street Prep’s JoeCo coffee company example uses identical mechanics with a 3.2x MOIC and 26 percent IRR outcome, the difference being higher EBITDA growth (10 percent vs 5 percent) and one turn of multiple expansion. Street of Walls’s ABC Company example uses 5.0x entry and 60/40 debt-equity to arrive at a 2.93x MOIC. Both walkthroughs follow the same five-step structure as above; the only thing that changes is the input numbers and which lever does the heavy lifting on returns.

Worked Example 2: 3-Year Hold Anchored to a Real 2024-2026 PE Deal

Three-year holds are the second most common paper LBO scenario in 2025 and 2026 interviews, driven by the compression in median PE hold periods over the past three years. Per Bain’s 2025 Global Private Equity Report, median hold periods for sponsor-backed buyouts compressed from 5.7 years in 2021 to roughly 4 years in 2024 and 2025, with many platform deals exiting in 3 years via continuation funds, GP-led secondaries, or strategic sales.

For grounding, this example uses a structure analogous to recent take-privates documented in SEC 8-K filings. The Apollo / Bridge Investment Group acquisition 8-K filed in August 2025 and other KKR 8-K filings across 2025 show the structures sponsors are using in the current cycle. Below we walk a stylized 3-year hold using market-typical assumptions.

Setup: a sponsor buys a $500M revenue franchised platform with a 25 percent EBITDA margin ($125M EBITDA), growing revenue at 6 percent annually. Entry multiple is 11x EBITDA, leverage is 6.0x at a 9 percent blended cost (lower than our first example because the franchise model commands tighter pricing), 3-year hold, exit multiple expands one turn to 12x on the strength of the platform.

Inputs:

• Revenue: $500M, 6% annual growth
• EBITDA: $125M, 25% margin (flat)
• Entry multiple: 11.0x
• Leverage: 6.0x, 9% blended interest
• Hold: 3 years, exit at 12.0x

Sources and uses:

• Entry EV: 11.0x x $125M = $1,375M
• Debt funded: 6.0x x $125M = $750M
• Sponsor equity: $1,375M – $750M = $625M

EBITDA build: 6% growth over 3 years is roughly 1.19x. Year 3 EBITDA: $125M x 1.19 = $149M, round to $150M.

Cumulative levered FCF (3 years): Average EBITDA across the hold is roughly $137M. Average interest at 9 percent on an average debt balance of about $700M is $63M per year. (EBITDA minus interest) is roughly $74M average. After 25 percent taxes, average annual FCF is roughly $55M. Three-year cumulative FCF: $165M. Round to $165M.

Debt schedule: Starting debt $750M, less $165M cumulative sweep = $585M ending debt.

Exit:

• Year 3 EBITDA: $150M
• Exit EV: 12.0x x $150M = $1,800M
• Less ending debt: $585M
• Exit equity: $1,215M

Returns:

• MOIC: $1,215M / $625M = 1.94x, round to 2.0x
• IRR over 3 years for 2.0x MOIC: approximately 26 percent (per the shortcut table)

A 2.0x MOIC over 3 years equating to a 26 percent gross IRR sits exactly on the buyout industry benchmark for a “good” returns profile, well above the 20 percent net IRR most middle-market PE funds target for their limited partners per Preqin’s buyout fund performance benchmarks. The 1.94x MOIC in 3 years is also close to what S&P Global Market Intelligence reports as the median realized MOIC for short-hold sponsor exits in the 2023 to 2025 vintage.

The 3-year hold scenario is what Peak Frameworks calls out in its paper LBO walkthrough as the variation most candidates fumble, because the IRR table values for 3-year holds are higher than the 5-year values they have memorized. The fix is to memorize the 3-year row alongside the 5-year row: 2.0x over 3 years is 26 percent, 2.5x is 36 percent, 3.0x is 44 percent.

Common Interviewer Traps (NTM vs LTM, Fees in S and U, Management Rollover, PIK Toggle, OID)

Once you have the base case down, expect the interviewer to layer in a complication designed to filter candidates who memorized a single example versus those who understand the mechanics. Five traps show up consistently in the Wall Street Oasis interview archive and in the Mergers and Inquisitions PE interview question library.

Trap 1: NTM versus LTM exit multiple. The interviewer says “exit at 10x” but does not specify whether that is 10x next-twelve-months EBITDA or 10x last-twelve-months EBITDA. The two numbers differ by one year of growth. For a 5 percent grower, NTM EBITDA is 5 percent higher than LTM, which shifts exit EV by 5 percent and MOIC by roughly 0.1x to 0.2x. Multiple Expansion’s “Real Paper LBO” walkthrough identifies this as the most common gotcha. Ask the interviewer “is that 10x LTM or 10x NTM?” before you compute exit EV. They will respect the question.

Trap 2: Fees in the sources and uses. Real LBOs include 2 to 4 percent transaction fees (financing, advisory, legal, accounting) that get capitalized into the entry EV. On a $200M deal, that is $4M to $8M of additional uses funded by sponsor equity. Interviewers sometimes add “and there are $6M of transaction fees” mid-prompt to see if you increase the sponsor check from $80M to $86M. The fix: write the fees as a separate line in your sources and uses, and bump the equity check accordingly. The Macabacus LBO reference documents the standard fee schedule.

Trap 3: Management rollover. The selling management team rolls 10 to 25 percent of their proceeds into the new equity, reducing the sponsor’s required equity check. If management rolls $10M on our $80M deal, the sponsor only writes a $70M check, and the MOIC at exit is computed on the $70M (sponsor-only) basis. Management’s $10M roll plus their pro-rata share of exit equity goes in a separate column. The interviewer is testing whether you distinguish sponsor MOIC from blended deal MOIC.

Trap 4: PIK toggle structure. A portion of the debt (commonly mezzanine or second lien) has a payment-in-kind option, where interest accrues to principal instead of being paid in cash. PIK debt grows the debt balance over the hold but preserves cash flow for capex or growth. The interviewer wants to see that you can hold the cash interest line down while the debt balance climbs, then adjust exit equity for the larger ending debt number. A typical PIK structure adds 1.5 to 2.0 turns of leverage at 12 to 14 percent PIK interest rates. The KKR FY2025 8-K filings show several recent deals with junior PIK tranches structured this way.

Trap 5: Original issue discount (OID). Term loans are often issued at 99 cents on the dollar (a 1 point OID) to entice the syndicate. The borrower receives 99 percent of the principal but owes interest on 100 percent and repays 100 percent at maturity. The economic cost of OID adds roughly 25 to 50 basis points to the effective interest rate. For paper LBO purposes, you do not need to compute OID precisely; just acknowledge it adds to the effective coupon if the interviewer asks. Wall Street Oasis threads on unitranche pricing regularly debate the OID convention.

A sixth less-common trap is mid-period convention. Real LBO models often compute IRR using a mid-year convention (assume cash flows arrive at the midpoint of each year), which adds roughly 0.5 to 1.0 percentage point to the IRR. For paper LBO purposes, year-end convention is the standard. If the interviewer asks “would mid-period convention change your answer?” the right response is “yes, by roughly 0.5 to 1 point higher.”

How Interviewers Actually Ask: 5 Real Prompts From Wall Street Oasis

The Wall Street Oasis private equity forum archives hundreds of first-person paper LBO write-ups from candidates who went through megafund, upper-middle-market, and growth equity processes. Five canonical prompt formats keep appearing:

Prompt 1 (megafund, technical heavy): “$100M revenue, 20 percent EBITDA margin, growing 5 percent. 10x entry, 6x leverage at 10 percent. 5-year hold, exit at entry multiple. What’s the IRR?” This is the canonical version covered in worked example 1.

Prompt 2 (upper-middle-market, growth-tilted): “$50M revenue tech-enabled services business, 30 percent margin, growing 15 percent. 12x entry, 5x leverage at 9 percent. 5-year hold, exit at 11x. Walk me through it.” Higher growth, lower leverage, slight multiple compression. Answer typically lands at a 2.5x to 3.0x MOIC and 20 to 25 percent IRR.

Prompt 3 (growth equity): “$30M revenue SaaS company, 10 percent EBITDA margin (most reinvested in S&M), growing 40 percent. We’re investing $50M for 25 percent. 5-year hold, expected exit at $300M revenue, 25 percent margin, 15x EBITDA.” Growth equity prompts skip the leverage step. Exit EV: $300M x 25% x 15x = $1,125M. Sponsor’s 25 percent = $281M. MOIC = 5.6x. IRR over 5 years ~ 41 percent.

Prompt 4 (distressed or special situations): Company bought out of bankruptcy at 4x distressed EBITDA, 3-year turnaround hold, exit at 7x trailing on doubled EBITDA. Distressed prompts compress the hold and rely on multiple expansion plus operational turnaround. Graded on whether you catch the over-extension trap.

Prompt 5 (infrastructure or buy-and-hold): “$200M revenue regulated utility, 35 percent margin, growing 3 percent. 8x entry, 7x leverage at 7 percent, 10-year hold, exit at entry.” Long hold periods, slow growth, high leverage. Lands at a 2.5x to 3.0x MOIC and 10 to 12 percent IRR. Infrastructure funds underwrite to lower IRR thresholds than buyout funds, which is the test.

Practice all five prompt formats before megafund rounds. Candidates who have only memorized the canonical 5-year mid-market prompt get caught flat-footed when an interviewer pulls out a growth equity or distressed scenario. The Growth Equity Interview Guide publishes additional variations specifically calibrated to growth equity shops like Insight Partners and General Atlantic.

How the Paper LBO Connects to Real M&A Practice

The paper LBO is not just an interview drill. It is the same back-of-envelope math that gets run constantly in real deal contexts: at the bottom of the first banker call when the team has to decide whether to do another meeting, in the first 10 minutes of an investment committee memo discussion, and during competitive bid prep when the deal team has to flex assumptions live. The same skill is core to how investment bankers value a business in a sell-side pitch, where the sell-side advisor has to sanity check a buyer’s IRR math on the fly.

For founders and operators considering a sale, understanding the paper LBO from the sponsor’s side helps you anticipate what bidders are computing when they look at your business. If you are exploring a management buyout structure, the paper LBO is the math your MBO sponsor is running on the equity check, debt sizing, and management rollover. If you are evaluating a partial recap, our recapitalization explainer shows how the paper LBO modifies for dividend recaps and continuation funds.

For broader context on buy-side recruiting and the firms you may be interviewing with, our guide to the top private equity firms you should know covers AUM, strategies, and recent transaction activity of the 40 largest sponsors. For background on what an LBO actually is at the structural level, see our business acquisition meaning explainer, and for the full Excel build, the LBO model step-by-step guide is the next stop.

Paper LBO Example: Frequently Asked Questions

What is a paper LBO?

A paper LBO is a leveraged buyout calculation done with pen and scratch paper in 5 to 10 minutes, with no Excel and no calculator. It tests whether a PE candidate can compute the IRR on a sponsor equity check from five inputs (revenue, EBITDA margin, entry multiple, leverage, hold period) using only mental math. The exercise is the canonical first technical drill in private equity interviews across megafund, upper-middle-market, and growth equity recruiting.

How long should a paper LBO take?

Between 5 and 10 minutes from prompt to final IRR. Candidates who finish in under 5 minutes usually skip the debt paydown step. Candidates who take longer than 10 minutes get cut off by the interviewer or run out of time for follow-up variations. Practice with a stopwatch until you hit a clean 7-minute walkthrough on the base case.

What MOIC equals 20 percent IRR over 5 years?

A 2.5x MOIC over a 5-year hold equates to approximately 20 percent IRR. That is one of the three anchor pairs every PE candidate must memorize cold (2.0x = 15%, 2.5x = 20%, 3.0x = 25% for a 5-year hold). The exact formula is IRR = MOIC raised to (1 divided by years) minus 1, so 2.5 raised to (1/5) minus 1 equals 0.2011, or 20.1 percent.

What is the Rule of 72 in LBO?

The Rule of 72 is the mental math shortcut for converting between IRR and years-to-double. Divide 72 by the IRR percentage to get the number of years for equity to double. At 15 percent IRR, equity doubles every 4.8 years. At 24 percent IRR, equity doubles every 3 years. Run it backward to back into IRR from a MOIC: if equity doubles in 5 years, the IRR is roughly 14 to 15 percent. The companion Rule of 115 covers tripling: divide 115 by IRR to get years to triple.

What assumptions do I need for a paper LBO?

Five inputs are required: starting revenue, EBITDA margin (or absolute EBITDA), entry multiple (EV/EBITDA), capital structure (debt as a turn of EBITDA, blended interest rate), and hold period. If the prompt omits any of these, ask the interviewer to clarify before you start computing. A common sixth input is the revenue growth rate, which most interviewers state explicitly but some leave for you to ask.

Do I get a calculator in a paper LBO?

No. The exercise is mental math with scratch paper. Asking for a calculator signals you have not practiced the IRR shortcuts or the EBITDA compounding tables. The interviewer will let you write on paper and hand you a pen; no calculator, no phone, no laptop. Some virtual interviews now use a shared whiteboard, but the no-calculator rule still applies.

What is the difference between a paper LBO and a full LBO model?

The paper LBO uses round numbers, mental math, and no Excel. The full LBO model uses precise inputs, a three-statement projection, and detailed debt schedules with mandatory amortization, cash sweeps, revolver behavior, and tax shield modeling. The paper LBO tests whether you understand the levers; the full model tests whether you can execute on a live deal. Our LBO model step-by-step guide covers the full Excel build in detail.

How much debt do you use in a paper LBO?

The default assumption is 5x to 6x EBITDA, which tracks the median total leverage on sponsor-backed buyouts per PitchBook LCD market data. Some prompts go as high as 7x for asset-heavy buyouts or as low as 4x for stretched-equity scenarios. The LSTA publishes ongoing leverage trend data through the Morningstar / LSTA Leveraged Loan Index.

What exit multiple should I assume?

Default to “exit at entry multiple” unless the prompt specifies otherwise. Multiple expansion is a value-creation lever the sponsor should not be assumed to control, so the conservative default is flat. If the interviewer asks you to flex the exit multiple, plus or minus one turn is the standard test (e.g., entry at 10x, exit at 9x or 11x), and you should be able to re-quote MOIC and IRR in under 30 seconds.

What IRR is good for a paper LBO answer?

Between 18 and 25 percent for a base case is the credible range. Below 15 percent and the deal does not clear most fund hurdle rates (which sit at 8 percent preferred return per ILPA principles guidance). Above 30 percent and the interviewer assumes either an arithmetic error or unrealistic multiple expansion. Anchor at 20 percent as the default and adjust based on the specific entry multiple, leverage, and growth assumptions in the prompt.

What if I get a different IRR than the interviewer expects?

If your IRR is within 3 percentage points of theirs, you are fine. Interviewers know mental math produces a range. The wrong move is to argue or silently change your number. The right move is to walk back through your assumptions out loud and identify which input (typically FCF conversion or exit multiple) drove the gap. Most candidate-interviewer differences trace to one of those two.

Do I need to memorize the IRR table for 3-year and 7-year holds?

Yes for 3-year, mostly for 7-year. About 80 percent of paper LBO prompts use a 5-year hold, 15 percent use 3 years (typically for distressed, GP-led secondary, or continuation fund prompts), and 5 percent use 7 to 10 years (typically for infrastructure or buy-and-hold strategies). Memorize the 5-year row cold, the 3-year row well, and at least the 2.0x and 3.0x entries on the 7-year row.