LBO Interview Questions
The LBO is the final boss of technical interviews. Whether you're targeting PE or IB, you need to understand leveraged buyouts cold. Here are the questions, the 4 return drivers, and the paper LBO framework.
The 4 LBO Return Drivers
Every interviewer expects you to know these. Understanding how returns are generated is more important than memorizing formulas.
EBITDA Growth
Revenue growth + margin expansion. Most valued by PE firms, indicates actual value creation.
Multiple Expansion
Buy at 10x, sell at 12x. Partially market-driven, partially operational improvement.
Debt Paydown
Company's cash flows repay debt, growing the equity slice. Works even with zero growth.
Cash Generation
Dividend recaps and cash accumulation return capital before exit, boosting IRR.
Interviewer Insight
PE firms value EBITDA growth highest because it indicates genuine operational improvement. Multiple expansion is partly luck (market timing). Strong candidates frame their LBO analysis around value creation, not just financial engineering.
What Makes a Good LBO Candidate?
LBO Questions by Frequency
Walk me through an LBO.
PE fund buys a company using mostly debt. Company's cash flows service the debt over 3-7 years. Fund exits at a profit. Returns driven by EBITDA growth, multiple expansion, debt paydown, and cash generation.
What makes a good LBO candidate?
Stable/predictable cash flows, strong market position, low CapEx needs, operational improvement opportunity, and experienced management. The company must reliably service debt regardless of economic cycles.
What are sources and uses?
Uses: purchase price + fees + refinancing existing debt. Sources: senior debt + subordinated debt + sponsor equity (+ management rollover). Sources must equal uses.
How do you calculate IRR and MOIC?
MOIC = Exit Equity / Entry Equity. IRR = annualized return. Rule of 72: 2x in 5 years ≈ 15% IRR, 2.5x ≈ 20%, 3x ≈ 25%. PE targets 20-25% IRR and 2.5x+ MOIC.
Why does leverage amplify returns?
You earn returns on borrowed money. If total asset return exceeds cost of debt, the spread is pure equity value creation. More leverage = higher equity return (and higher risk).
What happens if the company can't service its debt?
Restructuring: lenders may extend maturities, reduce rates, or convert debt to equity. Worst case: bankruptcy, and the PE fund loses its investment. This is the core risk of leverage.
How does the debt schedule work?
Track each tranche: beginning balance, mandatory amortization, optional prepayments (cash sweep), ending balance. Senior debt has priority. Cash sweep typically 50-75% of excess cash flow.
Walk me through a paper LBO.
Calculate purchase price (EBITDA × entry multiple), set up S&U, project EBITDA 5 years, calculate annual FCF for debt paydown, compute exit equity (exit EBITDA × exit multiple - remaining debt), derive MOIC and estimate IRR.
LBO Mastery in One Guide
Get the timed paper LBO system: setup order, mental math shortcuts, worked examples, return attribution, and practice reps built for PE case screens.