I need your help.
What is the best way to respond to "walk me through an LBO model" question.
Any good advice/suggestions? Things to avoid?
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Interview Question - Leveraged Buyout Walkthrough
This is a very common interview question especially within private equity interviews. It is answered in detail in our WSO Private Equity interview guide.
At a high level, there are 5 steps to an LBO:
- Calculate the total acquisition price, including acquisition of the target's equity, repayment of any
outstanding debt, and any transaction fees (such as the fees paid to investment banks and deal
lawyers, accountants, consultants, etc.).
- Determine how that total price will be paid including: equity from the PE sponsor, roll-over equity
from existing owners or managers, debt, seller financing, etc.
- Project the target's operating performance over ~5 years and determine how much of the debt
principal used to acquire the target can be paid down using the target's FCF over that time.
- Project how much the target could be sold for after ~5 years in light of its projected operating
performance; Subtract any remaining net debt from this total to determine projected returns for
- Calculate the projected IRR and MoM return on equity based on the amount of equity originally
used to acquire the target and the projected equity returns upon exit.
What Is An LBO?
If your interviewer wants you to explain an LBO conceptually watch the below video for a great interview answer to "what is an LBO?"
Also - check out the WSO finance dictionary description of a Leveraged Buyout to learn more.
Interviewing for Private Equity Jobs?
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