LBO paper model examples?

Hi fellow monkeys (and humans) - what's a good source (website / book) to get a hold of examples of LBO paper model type questions asked of candidates in interviews? A forum for lbo models was created earlier, with the view point of helping candidates, however, there was no response. Any help would be greatly appreciated. Thanks.

 

It's not all that different than building a quick LBO in excel, perhaps easier since there tend to be a lot of simplifying assumptions. Paper LBO's aren't meant to test your mental math skills so much as they are there to test that you can understand and do an lbo model in an unfamiliar setting.

For example, many times you'll be told to assume that cash just accrues and isn't sweeped to amortize debt principal (so that you have the same interest payments each period).

 

Also, p.94 - 98 of Vault Guide's PE and HF Interview books has another paper LBO example. The guide is pretty good and costs like $30 which lets be honest is 10% of WSO's cost...

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

As one of the posters above said, paper LBO questions aren't necessarily meant to test your mental math skills - it's more about testing whether you understand the mechanics of an LBO and how the different variables/levers are connected.

Questions can be based on either a hypothetical example or one of the deals on your resume.

A sample question could be as follows: "Imagine you purchase a business at 9.0x EBITDA multiple and you believe you can sell it in 5 years at the same 9.0x EBITDA multiple. Your required IRR is 25%. Assume that you can get 4x leverage and half gets repaid through year 5. How much do you need to grow EBITDA by in this time to achieve your desired IRR?

You can then test yourself by solving for different variables in similar questions (e.g., what is the max you can afford to pay for a business to achieve a specific IRR given certain cash flow, exit multiple, and leverage parameters; what exit multiple is needed in order to achieve a specific IRR given certain cash flow, entry multiple, and leverage parameters; etc.)

One helpful tip is to memorize the IRR-to-MOIC conversion table (i.e., knowing what IRR is implied for a certain MOIC and exit year) since this will help you approximate IRRs quickly.

 

Hi ASM_123, thanks for your response. In your example, is it correct to say that EBITDA would need to increase by approx 125% (or by 1.25x). I'm not sure how the leverage pay down will impact EBITDA here and my calculation is simply 25% increase in EBITDA over 5 years. If not correct kindly explain.

Also, where can I find similar questions and answers or material to gain a better understanding and prepare myself for this interview? Your help is much appreciated. Thanks.

 
Best Response

Let's walk through the example in steps given the provided information (which will alway dictate where you should start and what you need to solver for)

1.a We need to first understand what our equity check will be at entry 1.b We know our entry multiple is 9x. Let's assume that EBITDA at entry is $100M (it doesn't matter what number you assume for the starting EBITDA - the math will work the same way - but using $100M will make the calculations easier during the interview), which means our purchase price will be $900M 1.c We know our leverage will be 4x EBITDA, which is $400M 1.d. This means our equity check at entry will be $500M ($900M - $400M)

2.a We next need to understand what our exit equity value needs to be to satisfy the 25% return threshold 2.b Based on the IRR-to-MOIC conversion (which you should have memorized), we know that this equates to a 3x cash-on-cash return 2.c We can therefore multiply our entry equity check of $500 by 3 to get to an implied exit equity value of $1500

3.a Now we need to know what the implied exit enterprise value will be in year 5 3.b We know that our debt will be paid off in half by the time of exit, which means our debt will be $200M at the end of year 5 3.c If we add this $200M to our $1500 exit equity value, we get to an implied exit enterprise value of $1700

4.a Lastly, we now need to know what the year 5 EBITDA needs to be in order to square the 9x exit multiple with the $1700 implied exit enterprise value 4.b Divide $1700 by 9 to get to an implied year 5 EBITDA of $189M 4.c If we divide our exit EBITDA of $189M by our entry EBITDA of $100, we see that we need to grow our EBITDA by roughly 89% to get our 25% IRR

 

I suggest that you try to figure this out on your own, it's not that hard as there are many, many examples of both.

I will also point out that paying down 100% of the debt is not necessarily required for a successful (or profitable) LBO.

"Give a man a fish and you feed him for a day. Don’t teach the man to fish, and you feed yourself. He’s a grown man. Fishing’s not that hard."-Ron Swanson

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Are you currently in banking? If so, you should be able to get several from your colleagues or other banker friends. I'd send you something, but I like my online anonymity.

 
lskyeel:
Does anybody have a case study with the lbo model worked out so I can prepare for this interview? I know wallstreetoasis has a PE/VC guide, but does it include a case study with an LBO model?

Thanks.

The Breaking into PE / VC WSO guide does not have an LBO model, but our new Tech PE interview guide which should be coming out within a few months will have one.

 
WallStreetOasis.com:
lskyeel:
Does anybody have a case study with the lbo model worked out so I can prepare for this interview? I know wallstreetoasis has a PE/VC guide, but does it include a case study with an LBO model?

Thanks.

The Breaking into PE / VC WSO guide does not have an LBO model, but our new Tech PE interview guide which should be coming out within a few months will have one.

When is the new tech PE guide coming out!?!?

 
WallStreetOasis.com:
lskyeel:
Does anybody have a case study with the LBO model worked out so I can prepare for this interview? I know wallstreetoasis has a PE/VC guide, but does it include a case study with an LBO model?

Thanks.

The Breaking into PE / VC WSO guide does not have an LBO model, but our new Tech PE interview guide which should be coming out within a few months will have one.

WHEN IS THE TECH PE GUIDE COMING OUT!>?!??!

 
Skinnayyy:

Repackaging would be KKR with safeway.

Why wouldn't you list Safeway as a savior play? Wasnt the company struggling and about to get taken over by a competitor?

______ Corporate financial/business analyst looking for career/MBA/CFA advice.
 

BX of Equity office. It's a little different because they bought a REIT but they sold a lot of those properties off.

Hertz was bought by Carlyle and if I remember correctly they did a quick flip IPO.

Bain bought Clear Channel and broke it up but I'm not sure that was on purpose because it was a horrible deal. We were invested in a company that had a large relationship with CC and once that deal went through CC became a clusterfuck.

Bunch of stuff online with examples.

 

Repackaging/turnaround: BX's acquisition of Hilton, an iconic name that had since fallen behind Starwood, Marriot and others and became better known for its heiress's sex tapes than managerial excellence. BX brought in new management team led by Chris Nasetta, moved headquarters from Beverly Hills to Virginia and vastly expanded its mid tier properties on a global basis. This is such a classic example as BX closed this deal at the absolute top of the market, loaded the company with debt and then still managed to make it all work out in the end with the successful re-IPO and great stock performance since.

Too late for second-guessing Too late to go back to sleep.
 

In my opinion you are far, far better off building it from scratch. If you do so, not only will you ensure that you understand it, but you can customize it in the way you want.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

Build it from scratch.

All standard LBO models circulate on the street, I personally have seen standard LBO templates from all BBs except for Goldman Sachs, Morgan Stanley and Credit Suisse, plus a few elite boutiques. Therefore, if you take the shortcut to use a template, there is a good chance that the PE shop has seen the model from someone or somewhere. Not good.

 

Aliquam recusandae et quo cum. Qui quaerat rem ratione in dolor sit. Quos et suscipit eum quia minima animi. Voluptatem sunt aut consequatur rerum quia qui repudiandae. Cumque cupiditate sint qui dolor et vitae occaecati odit. Doloremque voluptas modi expedita.

Exercitationem architecto quo aut corporis possimus earum illo. Iusto id quod ipsa quis.

 

Ducimus pariatur quia corporis architecto eum. Beatae rem et molestias tempora consequatur. Reprehenderit rerum facilis saepe labore consequuntur. Quos non adipisci ea aut placeat alias.

Et ipsam esse quaerat facilis. Assumenda doloribus iusto sequi rerum. Velit minus blanditiis sint aliquid. Similique suscipit aut quam perferendis. Sint aut sunt et non.

Minima illo ut deserunt necessitatibus omnis facere voluptates. Hic animi expedita in unde ut. Ex enim placeat nihil sequi. Voluptates reprehenderit qui voluptatum nihil nisi eum sunt.

 

Quia cum rerum consectetur qui consequatur asperiores. Voluptatem quaerat quis illo quisquam. Porro eius dolorum omnis quis quo numquam autem. Perspiciatis at nisi sit delectus. Ea voluptas odio aliquam rem nam nihil eveniet.

Iste natus vel omnis totam eos in error. Vel recusandae molestiae eos et repudiandae. Placeat voluptas et maiores. Consequatur iusto veniam non officiis incidunt dolores aliquid.

Career Advancement Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Warburg Pincus 99.0%
  • Blackstone Group 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

March 2024 Private Equity

  • Principal (9) $653
  • Director/MD (21) $586
  • Vice President (92) $362
  • 3rd+ Year Associate (89) $280
  • 2nd Year Associate (204) $268
  • 1st Year Associate (386) $229
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (313) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”