How to Ace the Paper LBO: Step-by-Step Framework + Practice Problems
The paper LBO is one of the most feared parts of the private equity interview. You are handed a one-page prompt with basic financial information about a company and asked to calculate returns, usually in 15 to 20 minutes with just a pen and paper. No Excel. No calculator. Just your brain and a framework.
The good news: paper LBOs are extremely learnable. With the right framework and enough practice reps, you can walk into any PE interview and handle the paper LBO with confidence. Here is exactly how to do it.
The 5-Step Paper LBO Framework
Every paper LBO follows the same core structure. Memorize these five steps and you will have a reliable process for any prompt you receive.
Multiply EBITDA by the entry multiple to get Enterprise Value. This is your total acquisition cost. Example: $50M EBITDA at 10x = $500M EV.
Uses = purchase price (plus any fees if stated). Sources = debt (based on leverage ratio or turns of EBITDA) plus sponsor equity. If the prompt says 5x leverage on $50M EBITDA, that is $250M debt. Equity = $500M - $250M = $250M.
Calculate annual free cash flow: EBITDA - interest expense - taxes - capex +/- working capital changes. Use this to pay down debt each year. Keep a running tally of remaining debt. Round aggressively. Your interviewer cares about process, not the third decimal place.
Apply the exit multiple to projected EBITDA at exit. Example: if EBITDA grows to $70M and exit multiple is 10x, exit EV = $700M. Subtract remaining debt to get exit equity value.
MOIC = exit equity / initial equity. Use the Rule of 72 or other shortcuts (below) to estimate IRR from MOIC and hold period.
Mental Math Shortcuts You Must Know
You will not have a calculator, so mental math shortcuts are essential. These are the ones that matter most.
The Rule of 72
To find how many years it takes to double your money at a given rate: 72 / rate = years. Inversely, if you double in N years, IRR is approximately 72 / N. A 2x MOIC in 5 years = approximately 14-15% IRR.
The Rule of 144
For a 3x return, use 144 / years. A 3x in 5 years = roughly 28% IRR. This extends naturally: 4x in 5 years is approximately 32% IRR.
Quick IRR Reference Table
- 2.0x in 3 years = ~26% IRR
- 2.0x in 5 years = ~15% IRR
- 2.5x in 5 years = ~20% IRR
- 3.0x in 5 years = ~25% IRR
- 2.0x in 4 years = ~19% IRR
- 3.0x in 4 years = ~32% IRR
Commit this table to memory. In a timed paper LBO, looking up at the ceiling for three seconds and saying "that is roughly a 20% IRR" is faster and more impressive than fumbling through arithmetic.
Practice Problem 1: Basic Manufacturing LBO
Prompt
Target: Industrial parts manufacturer
LTM EBITDA: $80M, growing 5% per year
Entry Multiple: 8.0x
Leverage: 4.5x EBITDA (all term loan at 6% interest)
Tax Rate: 25%
Capex: $20M/year
D&A: $20M/year (equals capex, simplifying assumption)
Working Capital: Assume no change
Exit: Year 5, same 8.0x multiple
Mandatory Amortization: $10M/year
Walkthrough
Step 1: Entry EV = $80M x 8.0x = $640M.
Step 2: Debt = 4.5 x $80M = $360M. Equity = $640M - $360M = $280M.
Step 3: Year 1 FCF calculation: EBITDA = $84M (5% growth). Interest = $360M x 6% = ~$21.6M. Pre-tax income = $84M - $21.6M - $20M (D&A) = $42.4M. Tax = $42.4M x 25% = $10.6M. Net income = $31.8M. FCF = $31.8M + $20M (D&A) - $20M (capex) = $31.8M. Mandatory amortization = $10M. Cash available for optional paydown = $21.8M. Total debt paydown in Year 1 = $31.8M (use all FCF for paydown for simplicity).
Repeating this for 5 years (with growing EBITDA and declining interest), total debt paydown is roughly $175-180M. Remaining debt at exit is approximately $180M.
Step 4: Exit EBITDA = $80M x (1.05)^5 = ~$102M. Exit EV = $102M x 8.0x = $816M. Exit equity = $816M - $180M = $636M.
Step 5: MOIC = $636M / $280M = ~2.3x. Over 5 years, that is approximately 18% IRR.
Practice Problem 2: Software Company LBO
Prompt
Target: B2B SaaS company
LTM Revenue: $200M, growing 10% per year
EBITDA Margin: 30%, expanding 1 percentage point per year
Entry Multiple: 12.0x EBITDA
Leverage: 5.0x EBITDA at 5.5% interest
Tax Rate: 25%
Capex: 5% of revenue
D&A: Equal to capex
Working Capital: No change
Exit: Year 5, 12.0x EBITDA
Walkthrough
Step 1: LTM EBITDA = $200M x 30% = $60M. Entry EV = $60M x 12x = $720M.
Step 2: Debt = 5.0 x $60M = $300M. Equity = $720M - $300M = $420M.
Step 3: By Year 5, revenue = $200M x (1.10)^5 = ~$322M. EBITDA margin = 35%. Exit EBITDA = $322M x 35% = ~$113M. Over 5 years, cumulative FCF is substantial given the high margins and low capex. Estimate total debt paydown of roughly $200M, leaving $100M of remaining debt.
Step 4: Exit EV = $113M x 12x = $1,356M. Exit equity = $1,356M - $100M = $1,256M.
Step 5: MOIC = $1,256M / $420M = ~3.0x. Over 5 years = approximately 25% IRR. This illustrates why software businesses are attractive LBO targets: recurring revenue, expanding margins, and low capital requirements produce strong returns even at high entry multiples.
Common Paper LBO Mistakes
Capex is a real cash outflow. If D&A equals capex, they wash out in the cash flow, but you still need to show you understand the mechanics.
Always use projected EBITDA at the exit year, not the entry EBITDA. This is one of the most common errors under time pressure.
Interest should decrease each year as the principal declines. Many candidates keep interest flat, overstating costs and underestimating returns.
The paper LBO is a test of process and logic, not precision. Round to the nearest $5M. If your MOIC is 2.3x and you say "roughly 18% IRR," that is a great answer. Do not waste 5 minutes trying to get the exact IRR.
Related Guides
The paper LBO is a skill, and like any skill, it improves with deliberate practice. Work through at least ten different prompts before your interviews, varying industry, leverage, and growth assumptions each time. Build speed and confidence so the framework becomes second nature.
10 Paper LBO Practice Prompts with Full Solutions
PEPath includes timed paper LBO practice with step-by-step solutions, an integrated scratch pad, and difficulty levels from beginner to advanced.
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