A paper LBO is a simplified leveraged buyout analysis done by hand during interviews. You calculate entry equity (purchase price minus debt), project cash flows to determine debt paydown, calculate exit equity (exit enterprise value minus remaining debt plus excess cash), then derive MoM and IRR. It tests your ability to structure an LBO without a spreadsheet.

How do you walk through an LBO in an IB interview?

Q: How do you convert MoM to IRR in a paper LBO?

Use the memorized IRR lookup table: 2.0x in 3 years is roughly 26% IRR, 2.0x in 5 years is roughly 15% IRR, and 3.0x in 5 years is roughly 25% IRR. Interpolate between known values for other multiples, so 2.75x over 5 years lands around 22%.

Q: What are the three value creation levers in an LBO?

EBITDA growth increases exit enterprise value, multiple expansion means selling at a higher multiple than purchase (e.g., buy at 8x, sell at 10x), and debt paydown transfers value to equity as cash flows repay debt. Paper LBOs typically hold EBITDA flat and multiples constant to isolate the debt paydown effect.

Q: How do you calculate exit equity in a paper LBO?

Exit equity equals the exit enterprise value minus remaining debt plus any excess cash. Exit EV is calculated by applying the exit multiple to the final year's EBITDA. Remaining debt is the original debt minus cumulative cash flows used for repayment. If debt is fully repaid, additional cash accumulates as excess cash on the balance sheet.

How to answer "Walk me through an LBO" and solve a Paper LBO in an interview. The 3-step framework for calculating IRR in your head.

Michael Neal·5 min read·updated August 2026

On this page

Core mechanics
Value creation levers
Paper LBO framework
IRR lookup table
Worked example
Standard interview response
If they push: how would you increase returns?

"The secret to making money in a leveraged buyout is the same as making money in real estate: other people's money." (Carl Icahn)

Core mechanics

An LBO mirrors buying rental property with a massive mortgage. Minimal equity down, tenant rent services the debt, sell the asset for profit.

Buy: Acquire a company with minimal Equity and maximum Debt.
Operate: Use cash flow to pay down debt over 3-5 years.
Sell: Exit the investment. Lower debt balance means higher Equity value.

Value creation levers

Every LBO return derives from three sources:

Lever	Mechanism
EBITDA Growth	Grow earnings to increase exit value
Multiple Expansion	Sell at a higher multiple than purchase (buy 8x, sell 10x)
Debt Paydown	Cash flow repays debt; every dollar repaid transfers to equity

Paper LBOs typically hold EBITDA flat and multiples constant, isolating debt paydown. Real PE deals pull all three.

Paper LBO framework

Step 1: Entry Equity

\text{Entry Equity} = \text{Purchase Price} - \text{Debt}

Step 2: Exit Equity

\text{Exit Equity} = \text{Exit EV} - \text{Remaining Debt} + \text{Excess Cash}

Step 3: Returns Calculation

\text{MoM} = \frac{\text{Exit Equity}}{\text{Entry Equity}}

Convert MoM to IRR using the lookup table.

IRR lookup table

Memorize this.

MoM	3 Years	5 Years
1.5x	~14%	~8%
2.0x	~26%	~15%
2.5x	~36%	~20%
3.0x	~44%	~25%

Rule of thumb: 2x in 5 years ≈ 15% IRR. 3x in 5 years ≈ 25% IRR. Interpolate from there.

Worked example

Prompt: Buy a company for $100M at 5x EBITDA. 60% Debt, 40% Equity. 10% interest rate. EBITDA flat at $20M with 100% FCF conversion. Exit after 5 years at same multiple. Calculate IRR.

Step 1: Entry Equity

Purchase Price: $100M
Debt: $60M (60%)
Entry Equity: $40M

Step 2: Exit Equity

Annual FCF: $20M EBITDA − $6M Interest = $14M
Total Cash Generated: $14M × 5 = $70M
Debt Repaid: $60M (fully paid off)
Excess Cash: $70M − $60M = $10M
Exit EV: $100M (5x × $20M EBITDA)
Exit Equity: $100M + $10M = $110M

Step 3: Returns

MoM: $110M ÷ $40M = 2.75x
IRR: 2.75x over 5 years falls between 2.5x (~20%) and 3.0x (~25%) → ~22%

Standard interview response

"Walk me through an LBO."

"An LBO is an acquisition funded primarily with debt, where the target's cash flows service that debt over a 3-5 year holding period.

Step 1: Make assumptions: Purchase Price, Debt/Equity split, Interest Rate.

Step 2: Build Sources & Uses. Sources: Debt + Equity. Uses: Purchase Price + Fees.

Step 3: Adjust the Balance Sheet for the new capital structure. Add Goodwill if purchase price exceeds book value.

Step 4: Project financials to calculate Free Cash Flow available for debt repayment.

Step 5: Calculate Exit Value using an EBITDA multiple, subtract remaining Net Debt, determine Ending Equity Value. Returns measured as MoM and IRR.

The three drivers of returns are EBITDA growth, multiple expansion, and debt paydown."

If they push: how would you increase returns?

A common direction after the basic walkthrough is a follow-up on how you'd increase returns, though interviewers can take it other places too. The standard levers, as textbook material:

Pay less at entry: A lower purchase multiple means the same exit value returns more relative to the equity invested.
Use more leverage: Where the business can carry it, a higher Debt/Equity split raises the return on the equity actually invested.
Grow EBITDA: Through revenue growth or margin improvement, raising the earnings base the exit multiple gets applied to.
Exit at a higher multiple: Sell at a higher multiple than you paid at entry.
Return capital sooner: Getting cash back to investors earlier compresses the holding period and lifts IRR.

For the strategic acquirer perspective, see Accretion/Dilution Analysis.

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Frequently Asked Questions

What is a paper LBO?

How do you convert MoM to IRR in a paper LBO?

What are the three value creation levers in an LBO?

How do you calculate exit equity in a paper LBO?

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