The LBO Model Test, Solved: How a $1bn Coffee Company Returns 2.8x MOIC in Five Years

Everyone applying to private equity says they can "build an LBO." Almost nobody can do it under a timer, from a blank sheet, without a linking error blowing up the returns. That gap is exactly what the LBO model test is designed to find.

According to Alex Euripidou, the standard 1-hour LBO model test built on JoeCo, a $1bn-revenue coffee company bought at 10.0x EBITDA with 6.0x of leverage, works out to a 2.8x MOIC and a roughly 22% IRR over a five-year hold. Those two numbers are the whole point of the exercise, and if your model does not land on them, something upstream is broken.

This is the full walkthrough. Same prompt the buy-side actually uses, my own numbers, five clean steps.

What is an LBO model test?

The LBO model test is the technical screen in almost every private equity recruiting process. You get a short prompt describing a company and a proposed leveraged buyout, access to Excel, and a clock. You build an operating forecast, a financing structure, a debt schedule, and a returns calculation, then you report the internal rate of return (IRR) and the multiple on invested capital (MOIC).

Firms grade it on two things and two things only:

1. Accuracy. Do you actually understand the mechanics, or are you copying a template you do not follow?

2. Speed. Can you get there without the model breaking?

Tests come in three rough sizes: 30 minutes (a paper or "cocktail napkin" LBO), 1 hour (the one below), and 3 hours or more (a full case study with an investment recommendation). This is the 1-hour version, and it is the one most students should master first, because the 3-hour test is just this with more line items.

What does the LBO model test prompt look like?

Here is the JoeCo prompt in plain terms. A private equity firm is looking at buying JoeCo, a private coffee company. Over the last twelve months it did $1bn of revenue and $100mm of EBITDA. The sponsor thinks revenue keeps growing 10% a year with the EBITDA margin held flat.

The financing: 4.0x EBITDA of Term Loan B (seven-year maturity, 5% mandatory amortisation, priced at LIBOR plus 400 with a 2% floor), a $50mm revolver (LIBOR plus 400, 0.25% commitment fee on the unused portion), and 2.0x EBITDA of Senior Notes (seven-year, 8.5% fixed coupon). Financing fees are 2% of each debt tranche, and total transaction fees are $10mm.

The deal is cash-free, debt-free, so the seller clears the existing $200mm of debt and keeps the excess cash. Operating assumptions: D&A is 2% of revenue, capex is 2% of revenue, the change in net working capital is 1% of revenue, and the tax rate is 35%. Buy at 10.0x LTM EV/EBITDA, exit at the same 10.0x after five years. Find the IRR and the cash-on-cash return.

That is everything. Now the build.

Step 1: Model assumptions and entry valuation

Start by pinning down what you are paying and how you are funding it. $100mm of LTM EBITDA at 10.0x gives a $1bn purchase enterprise value. Because the deal is cash-free, debt-free, there is no net debt to adjust for from the sponsor's seat, so equity purchase price equals enterprise value.

Then lay out the debt. A "turn" of leverage is one times EBITDA, so 4.0x Term Loan B is $400mm and 2.0x Senior Notes is $200mm, for 6.0x total leverage. Financing fees are 2% of the $600mm raised, which is $12mm.

Step 2: Sources and uses

The sources and uses table answers two questions: what does the whole thing cost, and where does the money come from. Do the uses side first, because you cannot decide how to fund something before you know the bill.

Uses are the $1bn purchase price, $5mm of cash left on the balance sheet, $10mm of transaction fees and $12mm of financing fees, which is $1,027mm in total. Sources are the debt you already sized ($400mm Term Loan B and $200mm Senior Notes, revolver undrawn) plus the sponsor equity. Sponsor equity is the plug: $1,027mm of uses minus $600mm of debt equals a $427mm equity cheque.

That $427mm is the number every return in this model is measured against. Remember it.

Step 3: Free cash flow projection

Now forecast the cash the business throws off, because that cash is what pays down debt and services interest. Grow revenue 10% a year and hold the 10% EBITDA margin, so EBITDA runs from $110mm in 2021 to $161mm by 2025.

Work down from EBITDA to net income: subtract D&A to get EBIT, subtract interest and the amortisation of financing fees ($12mm over seven years, about $2mm a year) to get pre-tax income, then take 35% tax. Add D&A and fee amortisation back (they are non-cash), subtract capex and the change in working capital, and subtract the mandatory debt repayment, and you have free cash flow.

The tell here: free cash flow is positive in every single year, starting small at about $0.5mm in 2021 and building to roughly $24mm by 2025. That matters because it means JoeCo never has to draw the revolver. The revolver only exists to plug a cash shortfall, and there is no shortfall.

Step 4: The debt schedule

This is where most candidates lose the plot. The debt schedule tracks each tranche year by year using roll-forwards: beginning balance, movements, ending balance.

The Term Loan B amortises 5% of its original $400mm principal, so $20mm comes off every year regardless of how much is left. Its interest rate is the higher of LIBOR or the 2% floor, plus the 400 basis point spread, which lands around 6%, so interest runs about $23mm in 2021 and drifts down toward $20mm by 2025 as the balance shrinks. The Senior Notes are simpler: no amortisation, 8.5% fixed on $200mm, which is a flat $17mm of interest every year until maturity. The revolver stays at zero.

Once the debt schedule is done you go back and plug the two lines you left blank in Step 3, interest expense and mandatory amortisation, and the forecast is complete.

If you want to feel the mechanics rather than read them, the free AUS Complete Guide briefing lays out how the technical interview stack fits together across IB and PE, so you know which test comes at which stage before you sit one.

Step 5: The returns calculation

Exit on the same 10.0x multiple you entered on. Take the 2025 exit EBITDA of $161mm times 10.0x for a $1,611mm exit enterprise value. Subtract net debt at exit (total debt of about $500mm less the cash JoeCo has built up) to get an exit equity value of roughly $1,176mm.

MOIC is the simple one: $1,176mm of exit proceeds divided by the $427mm you put in, which is 2.8x your money. IRR is the annualised version of that same result, and turning 2.8x over five years lands at roughly 22% a year. Those are your two answers.

How is the LBO model test actually graded?

On a 1-hour test, the grader is not looking for a beautiful model. They are checking that the linkages flow, that the debt schedule does not circular-error itself into oblivion, and that your IRR and MOIC are in a sane range. Get the structure right and the returns fall out. Where people fail is not the maths, it is losing the thread on sign conventions and the debt waterfall under time pressure, then watching the returns go haywire and having no idea why.

The fix is reps. You do not get fast by understanding an LBO once. You get fast by building the same skeleton enough times that Steps 1, 2 and 5 are muscle memory and you spend your hour on the debt schedule, which is the only part that actually varies.

Frequently asked questions

How long should a basic LBO model test take?

The standard version is one hour from a blank spreadsheet. Earlier-stage screens can be a 30-minute paper LBO with no Excel, and later-stage case studies can run three hours or more and add an investment recommendation on top of the model.

What is a good IRR and MOIC on an LBO test?

For a five-year hold with no wild assumptions, a mid-20s IRR and a MOIC between 2.0x and 3.0x is a normal, credible answer. The JoeCo test lands at 2.8x MOIC and about 22% IRR. If you are seeing a 60% IRR, you have a linking error, not a great deal.

Why is the sponsor equity a "plug"?

Because you size the debt first, then the equity fills whatever gap is left between total uses and total debt. In JoeCo, $1,027mm of uses minus $600mm of debt leaves a $427mm equity cheque. The equity absorbs whatever the debt does not cover.

Why does the revolver stay undrawn in this model?

The revolver is an emergency line, drawn only when free cash flow turns negative. JoeCo generates positive free cash flow every year of the hold, so there is never a shortfall to cover, and the balance stays at zero.

Do I need to memorise the JoeCo numbers?

No. Memorise the structure: entry valuation, sources and uses, free cash flow, debt schedule, returns. The numbers change with every prompt. The five-step skeleton does not, and that is what makes you fast.

Practise this until it is muscle memory

Reading a solved LBO is not the same as building one under a timer. If you want the firm-by-firm view of where these tests sit in the process and which shops screen hardest, the AUS IB Top 300 Firms Playbook ($12 AUD) maps the recruiting landscape you are testing into. To rehearse on a real transaction structure rather than a textbook one, the EQUIS renewables private equity ACTUAL case study is an actual buy-side model you can work through.

And if you are not sure whether IB, PE or something else is even the right lane for your degree and marks, Career Path Mapping ($99 AUD) is a personalised 1:1 that maps the exact sequence for your situation, so you are not grinding LBO reps for a path that was never the right fit.

I break down interview tests like this one on my Instagram, @euripidoualex, follow for the next one.