Walk Me Through an LBO (with a model answer)

Free sample from the Deskcraft question bank

“Walk me through an LBO” is a staple of private equity and investment banking interviews. This guide gives the clean structure interviewers want — entry, leverage, deleveraging, exit and returns — plus the follow-ups, from the Deskcraft bank.

1. Walk me through a simple LBO.

Model answer

A sponsor buys a company using mostly debt and some equity. Set the purchase price as entry EBITDA times an entry multiple, fund it with debt (a leverage multiple of EBITDA) plus an equity plug. Over the hold the company's cash flow pays down debt and EBITDA grows. At exit, value the company as exit EBITDA times an exit multiple, repay remaining debt, and the equity left is the return, measured as MOIC (exit equity over entry equity) and IRR.

2. Walk me through the typical LBO debt tranches from senior to junior.

Model answer

A revolver and senior secured term loans (Term Loan A and B) come first, being the cheapest and secured. Then senior or subordinated high-yield notes, then mezzanine or PIK debt, then sponsor equity at the bottom. Higher tranches are cheaper and paid first in bankruptcy; lower tranches carry higher rates for more risk.

3. What makes a good LBO candidate?

Model answer

Stable, predictable cash flows to service debt; low capex and working-capital needs; strong margins; a defensible market position; room for operational improvement; a clean balance sheet with debt capacity; and a clear exit path. Mature, non-cyclical businesses are ideal.

4. Decompose LBO returns into their sources.

Model answer

Bridge from entry to exit equity using EBITDA growth times the entry multiple, multiple expansion times exit EBITDA, and debt paydown from cumulative free cash flow, less any leakage. This value-creation bridge shows how much return came from operations versus financial engineering versus market timing.