William Blair IB Interview Questions

If the $500mm is a six-month stub (January 1 to June 30, 2015), it does not match EV, which is a full-year value, so the denominator needs a full twelve months of EBITDA. If the $500mm is already annual, no period adjustment is needed. Use LTM (last twelve months) EBITDA ending 6/30/15, the deal date. With only the stub, annualize it: $500mm × 2 = $1,000mm. Then normalize that EBITDA for one-time items, acquisitions or divestitures made during the period, and accounting differences before you compare the multiple with other deals.

The financial sponsor (the private equity firm that bought the company) has $1,200mm of equity at the end of year 3. It paid $1,000mm (10x the $100mm of year-0 EBITDA), funded with $400mm of debt and $600mm of its own equity. Three $100mm paydowns cut the debt to $100mm, and the $1,300mm sale price minus that $100mm leaves $1,200mm for the sponsor. The 10% revenue growth does not change the answer, because the sale price is already given.

Debt shrinks the equity check (the cash the private equity buyer puts in itself) because in an LBO, or leveraged buyout, borrowed money funds most of the purchase price. Lenders are owed a fixed amount. So every gain in enterprise value (the value of the whole business) goes to equity, and so does every dollar of debt repaid from the company's cash flow. A modest rise in the business's value becomes a much larger percentage return on that smaller check. It cuts both ways. Equity sits behind the debt, so it absorbs a fall in value first, and leverage magnifies losses just as it magnifies gains.

The sponsor pays $600m of equity upfront. YR0 EBITDA is $1bn × 10% = $100m, so the purchase price is 10x × $100m = $1,000m. Debt covers 4x × $100m = $400m. Equity funds what's left: $1,000m − $400m = $600m.

Revenue is $1,100M in Year 1, $1,210M in Year 2, and $1,331M in Year 3. A 10% CAGR (compound annual growth rate, the steady yearly rate that links a starting value to an ending value) means you multiply each year's revenue by 1.1. The growth compounds on the prior year's number. You do not add a flat $100M each year.

Revenue grows 10% a year to $1,100m, $1,210m and $1,331m. At a 10% margin, year-0 EBITDA is $100m, so the purchase price is $1,000m. The loan is $400m, so the sponsor puts in $600m of equity. Years 1–3 EBITDA of $364m pays debt down to about $36m, which puts year-3 equity at about $964m at the entry valuation. Sell for $1.3bn and about $1,264m of equity is left. That is roughly 2.1x the money in, or about a 28% IRR. Sponsors usually target about 20–25%. For 7x leverage, the target needs large, stable, predictable cash flow that can service and repay much more debt.

It depends on the price you pay. The purchase price goes into enterprise value, and the target's $500mm goes into EBITDA. Pay a higher multiple than your own current EV/EBITDA and the combined multiple rises. Pay a lower one and it falls. Pay the same and it stays put.

Systematically audit the WACC inputs, verify FCF excludes interest and has correct NWC signs, ensure the terminal growth rate stays below nominal GDP with a normalized FCF, check the EV-to-equity bridge, and sanity-check implied multiples.

About 2.0x MOIC and about a 15% IRR, assuming a standard five-year hold, an exit at the entry multiple, and debt held flat at $400mm. MOIC (multiple on invested capital) is what the buyer's equity is worth at exit divided by what it put in. IRR (internal rate of return) is the same gain as an annual compound return. The buyer pays $1bn of EV (enterprise value, the price of the whole business) for $100mm of EBITDA (earnings before interest, taxes, depreciation and amortization, a rough measure of operating cash profit). That is 10x, funded with $400mm of debt and $600mm of equity. EBITDA grows to about $161mm and the business sells for about $1.61bn. Repay the $400mm of debt and the equity is worth about $1.21bn, roughly 2x the $600mm invested.

A good LBO candidate has strong, predictable free cash flow, low capital expenditure needs, a defensible market position, room to improve margins and clear ways to grow. A leveraged buyout (LBO) is an acquisition paid for mostly with borrowed money. The company's own cash flow has to cover the interest and repay the debt every year. The other traits make the business worth more at exit.

The IRR is about 15%. Assume a five-year hold, an exit at the same 10x multiple paid at entry, and debt held at $400mm. The $600mm of equity grows to about $1.21bn, roughly 2.0x the money put in, or about 15% a year. IRR (internal rate of return) is the annual compound return on the equity invested. EBITDA (earnings before interest, taxes, depreciation and amortization) is a stand-in for operating cash profit.

A typical sell-side process runs in five stages: preparation, Round 1, Round 2, negotiation and signing, then closing. First the bank prepares the marketing materials and a buyer list. Next it collects non-binding first bids. Then it gives the best bidders full diligence access and collects binding final bids. Last, it negotiates the purchase agreement with the winner, signs, and closes after approvals.