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?

Much appreciated.

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Comments (19)


have you built models before?

Financial Modeling


Yes, Merger/Accretion and discounted cash flow among others, but not LBO unfortunately.

Any advice for an upcoming interview? I would really like to do well. Thanks.


If you want to go the paying route I know the tts, dealmaven, wall street prep online courses all have lbo model training components to them. Might want to take a look at that


Yes - I guess I should be more specific.

I know how to build one. That is not a problem.

But what are the general points that interviewers would like me to hit when answering this question? I am not sure how detailed it should be.

Essentially, what is the "right" way to answer this question based on everyone else's experience?

Best Response

To me, somebody best demonstrates their understanding of LBO models if they can adequately explain in what context they are used. So, start off with the why: for what purpose have you built LBO models? Have you mainly done exploratory or confirmatory work, or both? In other words, do you use them as a valuation tool, pre-transaction, to "reality check" what you think a buyer may be able to pay for the business, given what you know about the amount (and type) of leverage you could put on the business, the projected cash flow profile, some assumed exit multiple, and "market" IRRs? Or have you used them to model out specific transactions, after you receive LOIs and after you have lender proposals on the table, to do sensitivity analyses on the proposed deals and capital structures?

After you tell them what you're typically using the model for, then get into what specific areas and assumptions you usually key in on. For instance, if I'm using the model as a valuation tool, I'm going to be very attuned to leverage and returns: how much leverage can I get (ABL and cash flow), what can the company bear (not necessarily the same), what's the pricing/am on that debt, how am I going to structure my equity (all common, preferred, participating preferred, etc...), and what do my returns look like at a variety of valuations going into the deal (and assuming no multiple arbitrage at exit and at a variety of other exit multiples). The whole theory is if I know what kind of returns I'm looking for, what the company's projected cash flows will look like, what I can make the balance sheet look like in terms of capital structure, and at what valuation I can get OUT at, then I can see if what I want to pay for the business is reasonable.

If I'm using a model as a confirmatory tool, then really I just want to make sure the assumptions are realistic on the proposed capital structure, make sure the company isn't going to blow through all their covenants if they have a flat or down year next year, and see what the returns will be to the different classes of shareholders/capital providers given a variety of scenarios (sensitivity...you get the point).

Anyway man, I know that's a longwinded answer...I just wrote down what came to mind. Hopefully it'll give you a mental foothold and get you thinking about where to at least start. I know you haven't built one from the ground up, but if you know how, you probably know at least what they're used for and how to evaluate one. Private message me if you're still stuck after you've thought about it some more.


Once more into the breach, dear friends.


"Indeed" has provided a very nice answer. At a high-level, understanding an "LBO Model" is no more complicated than understanding how to tie financial statements.

The only difference is a one-step adjustment to the balance sheet which occurs at the time of purchase.

Aside from that, IRRs should flow directly from cash flow distributions to each individual security (e.g., senior debt, sub-debt, mezz, seller notes, PIK notes, preferred equity and common equity).


Thanks that was great.


Indeed... nice post.




do analysts get that question, wouldn't that be more for an associate position

would an analyst really do an LBO model?


LBO is the acquisition of a company through the use of a substantial amount of borrowed funds. The power of an LBO comes from the use of high amounts of debt or leverage. The higher the leverage, the higher the risk. Usually an LBO will have three exit strategies for their investment: the sale of a company, recapitalization, or an IPO...

This was according to http://www.InterviewCrusher.com


Agree with the other posters. The one aspect I would want to add is that I think it's also important to understand the effects on IRRs if any of a number of variables were changed

  1. taking a longer/less time to exit
  2. If both exit multiples and purchase multiples were raised/lowered (e.g. 8x for both to 10x for both)
  3. Various different changes to debt paydown schedules

hi what are the responses to 1 and 2? For 1, for the same amount of initial PE equity, it depends on the exit equity return, right? Although it may take longer, the but if the equity return could be higher, then the effect is not clear. For Q2, is there even an answer? Coz i think it really depends.... thanks


how about you take a stab at it and im sure people on this board will help tweak your answer


you make the acquisition assumptions (offer price; number of shares; offer value; transaction value, fees, etc); complete the sources (debt structure) and uses; then the PF B/S; complete the balance sheet forecasts and income statement; then the debt repayment profiles; then the CF statement; balance the B/S. Afterwards, you can create debt ratios, return analysis (you need to complete the ownership structure) with sensitivity tables, etc.
Does that answer your question? Good luck for your interviews.


They have a good short text on this. (The best way to understand how LBOs work is to have had deal experience with them. That way, if someone asks you to go into further detail, you won't be stumped--plus you would have had a chance to apply this stuff in a real world context.)

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