Paper LBO Example: A Step-by-Step Walkthrough for PE Interviews

If a private equity interviewer says "let's do a quick paper LBO" and hands you nothing but a pen, they are testing whether the model already lives in your head, not whether you can build one in Excel. This guide is one clean, fully worked paper LBO example, built from scratch with numbers you can check, plus the mental-math shortcuts that get you through it in 5-10 minutes without a calculator.

Every figure below was computed in Python first and rounded to whole millions afterwards, the same way you'd round in the room. Nothing here is copied from a course or template. Work through it once with a pen and the next one is easy.

What is a paper LBO

A paper LBO is a stripped-down leveraged buyout model done live, on paper or a whiteboard, usually in 5 to 10 minutes, with no spreadsheet. You're given (or you assume) an entry multiple, a leverage level, a growth rate and a hold period, and you walk from purchase price through a rough five-year forecast to an exit equity value and a return.

It shows up constantly in private equity first-round and superday interviews, and increasingly in Australian PE and infrastructure processes too, plus some IB lateral interviews where the desk wants proof you think like an investor, not an analyst. Nobody expects a decimal-perfect answer. They want a candidate who can hold five moving parts in their head and land in the right ballpark.

What interviewers are actually testing

According to Alex Euripidou, "the paper LBO is a 5 to 10 minute mental-maths filter: interviewers are testing whether you can hold the LBO engine in your head, not whether you can build it in Excel."

Three things get scored, roughly in this order:

1. Structure. Do you know the shape of an LBO before touching a number: sources and uses, a forecast, a cash sweep, an exit. Candidates who freeze here never reach the maths.
2. Speed and composure. Can you round aggressively and keep moving, rather than get stuck multiplying 322.1 by 0.25 to three decimals.
3. Commercial sense. When you land on a MOIC and an IRR, do you know instantly whether that's a good deal for the fund interviewing you.

The step-by-step method

Every paper LBO, regardless of the numbers you're handed, runs through the same six moves.

1. Lock in the entry assumptions. Entry EBITDA, entry multiple (EV/EBITDA), leverage multiple (debt/EBITDA), revenue growth rate, margin, hold period. If the interviewer doesn't give you all of these, state a sensible assumption out loud and keep moving.
2. Sources and uses. The easiest marks in the exercise. Uses: entry enterprise value = entry EBITDA times the entry multiple. Sources: debt = entry EBITDA times the leverage multiple, equity is the plug.
3. Roll the five-year forecast. Each year: grow revenue, apply the margin for EBITDA, subtract a rough D&A charge for EBIT, subtract interest on the debt balance for pre-tax income, apply tax, then build back to free cash flow (net income plus D&A, less capex, less working capital growth).
4. Sweep the cash to debt. Nearly every paper LBO assumes a cash sweep: some or all of each year's free cash flow pays down debt rather than sitting idle. Debt falls while the business grows, even with a flat exit multiple.
5. Build the exit. Apply an exit multiple (often equal to entry) to final-year EBITDA for exit enterprise value, then subtract remaining debt for exit equity value.
6. Land the return. MOIC = exit equity value divided by entry equity value. IRR is the annualised version over the hold period, approximated rather than computed precisely by hand. More below.

Practice on a real PE exercise before your interview

A paper LBO is the warm-up. To feel the pressure of a full private equity modelling test before you're in the room, work through a real fund exercise end to end: the EQUIS Renewables Wind ACTUAL Case Study is a genuine operating-asset PE exercise, sanitised from a real fund process, with a full model and brief.

Want a fast primer first? Grab the free AUS Complete Guide Briefing, which maps how PE, IB and consulting recruiting differs across the year groups.

The full worked example: Bondi Health Foods

Here is the prompt as it might be given to you in an interview.

The prompt: "A private equity fund is buying Bondi Health Foods, a consumer health co-manufacturer with $50m of EBITDA on $200m of revenue, a 25% margin. The fund is paying an 8.0x EBITDA multiple and funding the deal with 5.0x EBITDA of debt at a 10% interest rate. Revenue grows 10% per year for five years, margin holds flat, D&A runs at 3% of revenue, capex at 4% of revenue, and incremental working capital investment eats 15% of the revenue increase each year. The tax rate is 30%. The fund sweeps 80% of free cash flow to pay down debt each year. At exit in year five, the fund sells at the same 8.0x EBITDA multiple. What's the MOIC and the IRR?"

Sources and uses

Checkpoint: $400m purchase price, 62.5% debt-funded (250 divided by 400), 37.5% equity, a normal AUS mid-market leverage level. Keep going.

Five-year forecast (rounded to the nearest $m)

Read the pattern, not the digits: revenue and EBITDA compound roughly 10% a year, interest shrinks as debt is paid down, and free cash flow accelerates as net income grows. In the room you'd build this exact grid, one column at a time, rounding hard at every step.

Exit and returns

Entry equity of $150m becomes exit equity of $471m across five years, without the fund lifting the exit multiple one turn. Growth plus deleveraging did essentially all of the work.

Mental-math shortcuts that actually get you through the room

You will never long-divide your way through a paper LBO. Two shortcuts, memorised cold, get you there.

The MOIC-to-IRR table

Candidates memorise roughly what each MOIC over a 5-year hold implies, rather than computing IRR precisely:

Our example landed at 3.1x over five years, which the table reads as roughly 25%, and the exact computed answer was 25.7%, close enough that nobody's pulling out a calculator to argue with you.

The Rule of 72

Divide 72 by the annual growth rate to estimate doubling time. At a 25% IRR, money doubles roughly every 2.9 years (72 divided by 25). Over a 5-year hold that's just under two doublings, consistent with a MOIC just over 3x. Use it as a sanity check against your MOIC-to-IRR read, the two should roughly agree.

Mistakes that fail candidates

• Forgetting the cash sweep. Carry the full entry debt to exit and you've understated the equity return before the interviewer says anything.
• Applying tax to a negative pre-tax number. If interest exceeds EBIT, pre-tax income is negative, no tax benefit to add back unless told otherwise. Don't invent a refund.
• Chasing false precision. Two decimal places under time pressure is how candidates run out of the clock. Round hard, say it out loud, move on.
• Ignoring capex and working capital. EBITDA is not cash flow. Skipping the capex and working capital haircut misses a step interviewers listen for.
• Not sanity-checking the answer. A 3.1x MOIC over five years on a sensibly levered, growing business is believable. An 8x MOIC or negative equity value means something's wrong, say so.
• Silence. Narrate every assumption. A quiet candidate who lands the right number scores worse than a talkative one who corrects a small slip out loud.

How AUS PE interviews differ

Paper LBOs aren't just a US mega-fund tradition. They turn up in Australian private equity processes too, particularly mid-market and infrastructure-adjacent funds, and occasionally in IB lateral interviews for candidates moving from a coverage or leveraged finance seat into a principal investing role. The core mechanics don't change between markets, entry multiple, leverage, a forecast, a sweep, an exit, but AUS interviewers are often more forgiving on precise multiples and more interested in whether you can talk sensibly about leverage relative to the asset (infrastructure or renewables supports far more debt than a cyclical consumer business) than in the exact decimal of your IRR.

FAQ

How long should a paper LBO take?

Most interviewers expect 5 to 10 minutes from prompt to answer, including talking through your logic out loud. Taking 20 minutes means you're being too precise, not too careful.

Do I need a calculator for a paper LBO?

No. Paper LBOs are designed to be done with rounding and mental-math shortcuts like the MOIC-to-IRR table and the Rule of 72. Asking for a calculator is itself a signal the interviewer notices.

What's a normal entry multiple and leverage level to assume if I'm not given one?

If the interviewer doesn't specify, roughly 7 to 9x EBITDA entry and 4.5 to 5.5x EBITDA of debt is a reasonable, defensible starting point almost anywhere.

Should I assume multiple expansion at exit?

Only if told to, or you have a specific reason to. The safer default, and the one used here, is a flat exit multiple equal to entry. It also makes a cleaner story: any return comes from growth and deleveraging, not from paying a smarter price than the next buyer.

What if my mental maths and my final MOIC don't line up?

Say so. Walking back through your own numbers out loud to find where a step went wrong is a stronger signal than silently presenting an answer you're not confident in.

Is a paper LBO the same as a full LBO model?

No. A full LBO model in Excel has dozens of line items, debt tranches, a full cap table and sensitivity tables. A paper LBO strips that down to the five or six moves in this guide, built to be done live without a spreadsheet.

Where to go from here

If you can walk through the Bondi Health Foods example above without looking at the tables, you're close to interview-ready. If multi-lane decisions (PE versus IB versus consulting) are still the real blocker, that's worth sorting properly rather than guessing your way through: Career Path Mapping ($99 AUD) builds a personalised path map rather than a generic one. If you already know PE or IB is the lane and want to walk into first rounds prepared, First Round Interview Prep - 1:1 is the done-for-you prep package built around your target firm.