A paper LBO is a leveraged buyout worked out by hand, in 5 to 10 minutes, with round numbers and no spreadsheet. Private equity interviewers use it to check that you understand where the return comes from: the price paid, the debt used, the cash the company produces and the price it is sold for. Below are three worked problems with every number shown, the mental math for turning a multiple into an IRR, and the follow-up questions that usually come next.

Who wrote this. We make Soreno, an AI interviewer for finance and consulting interviews. Every figure in the three problems was recomputed with a script before publishing, and the arithmetic is shown so you can check it yourself.

The five steps of every paper LBO

Purchase price. Entry EBITDA times the entry multiple gives the enterprise value.
Sources of money. Debt (often given as a multiple of EBITDA or a share of the price) plus sponsor equity equals the purchase price, when the prompt has no fees.
Cash flow each year. EBITDA, minus D&A, gives EBIT. Minus interest gives pre-tax income. Minus tax gives net income. Add back D&A, subtract capex and any increase in working capital, and you have the cash left to repay debt.
Exit. Exit EBITDA times the exit multiple gives the exit enterprise value. Subtract the debt that is left (net of cash built up) to get the sponsor's equity at exit.
Return. Exit equity divided by entry equity is the multiple of money (MOIC). Convert it to an IRR with the table below.

Say each step out loud before you calculate it. Interviewers mark the structure as much as the answer.

Multiple to IRR: the table to memorize

Money multiple	3 years	4 years	5 years	7 years
1.5x	14%	11%	8%	6%
2.0x	26%	19%	15%	10%
2.5x	36%	26%	20%	14%
3.0x	44%	32%	25%	17%
4.0x	59%	41%	32%	22%
5.0x	71%	50%	38%	26%

The three to know cold are for a five-year hold: 2x is about 15%, 2.5x is about 20%, 3x is about 25%. For a doubling, the rule of 72 gets you close: 72 divided by the years held (72 / 5 is about 14%).

Problem 1: the standard five-year paper LBO

Prompt. A sponsor buys a company with $50 million of EBITDA for 10x. It funds 60% of the price with debt at 8% interest and the rest with equity. EBITDA grows by $5 million a year. D&A and capex are each $10 million a year, working capital does not change, and the tax rate is 25%. No debt is repaid until exit, and the cash builds up on the balance sheet. The sponsor sells after five years at 10x. What are the MOIC and the IRR?

Step 1: purchase price. $50 million x 10 = $500 million.

Step 2: sources. Debt is 60% of $500 million = $300 million. Equity is $200 million. Interest is 8% of $300 million = $24 million a year.

Step 3: cash flow. Because D&A equals capex and working capital is flat, free cash flow equals net income.

$ millions	Year 1	Year 2	Year 3	Year 4	Year 5
EBITDA	55	60	65	70	75
Less D&A	10	10	10	10	10
EBIT	45	50	55	60	65
Less interest	24	24	24	24	24
Pre-tax income	21	26	31	36	41
Less tax at 25%	5.25	6.5	7.75	9	10.25
Net income	15.75	19.5	23.25	27	30.75
Free cash flow	15.75	19.5	23.25	27	30.75

Cash built up over five years: 15.75 + 19.5 + 23.25 + 27 + 30.75 = $116.25 million.

A faster way to the same total in an interview: net income rises by $3.75 million a year (the $5 million of extra EBITDA after 25% tax), so the five years average the year 3 figure. 23.25 x 5 = 116.25.

Step 4: exit. Year 5 EBITDA of $75 million x 10 = $750 million of enterprise value. Net debt is $300 million minus $116.25 million of cash = $183.75 million. Exit equity is 750 minus 183.75 = $566.25 million.

Step 5: return. 566.25 / 200 = 2.83x. On the table, that sits between 2.5x (20%) and 3x (25%) for five years, so the IRR is about 23%.

Where the return came from. Equity grew by $366.25 million. EBITDA growth produced $250 million of it (an extra $25 million of EBITDA at 10x). Cash from operations produced the other $116.25 million. The multiple did not change, so it added nothing. Interviewers often ask for exactly this split.

Problem 2: no growth, with a cash sweep

Prompt. A sponsor buys a company with $100 million of EBITDA for 6x, using debt of 4x EBITDA at 10% interest. EBITDA stays flat. D&A and capex are each $20 million, working capital is flat, and tax is 30%. All free cash flow repays debt each year. Exit after five years at 6x. What is the return?

Purchase price and sources. 100 x 6 = $600 million. Debt is 4 x 100 = $400 million. Equity is $200 million.

Cash flow. EBIT is 100 minus 20 = $80 million every year. Interest falls as debt is repaid.

$ millions	Year 1	Year 2	Year 3	Year 4	Year 5
Opening debt	400.0	372.0	342.0	310.0	275.7
EBIT	80.0	80.0	80.0	80.0	80.0
Interest at 10%	40.0	37.2	34.2	31.0	27.6
Pre-tax income	40.0	42.8	45.8	49.0	52.4
Tax at 30%	12.0	12.8	13.7	14.7	15.7
Net income = free cash flow	28.0	30.0	32.1	34.3	36.7
Closing debt	372.0	342.0	310.0	275.7	239.0

Exit. EBITDA is still $100 million, so the exit value is still $600 million. Debt left is $239 million. Exit equity is 600 minus 239 = $361 million.

Return. 361 / 200 = 1.8x, which is about 12.5% over five years.

The shortcut an interviewer will accept. Ignore the falling interest. Net income is (80 minus 40) x 70% = $28 million a year, or $140 million over five years. Debt falls to $260 million, equity is $340 million, and the multiple is 1.7x, about 11%. Then say: "Interest falls as the debt is repaid, so the true figure is a little higher, around 12%." That is the right answer, reached in a minute.

What this problem teaches. With no growth and no change in the multiple, the whole return comes from repaying debt with the company's cash. Leverage alone produced about 12% a year.

Problem 3: the questions asked after the answer

These use the company from Problem 1.

"What if you exit at 9x instead of 10x?" Exit value is 75 x 9 = $675 million. Equity is 675 minus 183.75 = $491.25 million, or 2.46x, about 20%. One turn of multiple cost about 3 points of IRR.

"And at 11x?" 75 x 11 = $825 million. Equity is $641.25 million, or 3.2x, about 26%.

"What exit multiple do you need for a 20% IRR?" A 20% IRR over five years needs about 2.5x, so $500 million of equity. Add net debt of about $184 million and the exit value has to be about $684 million. Divided by $75 million of EBITDA, that is about 9.1x. So the deal clears 20% even if the multiple falls by almost a full turn.

"Would more debt raise the return?" Yes, while the company can cover the interest. Less equity goes in, and the same exit value is shared by a smaller check. It also raises the interest bill, which cuts cash flow, and it leaves less room if EBITDA falls. A good answer names both sides.

"What would you check first in diligence?" Whether the $5 million a year of EBITDA growth is real: where it comes from (price, volume or cost), and how much of it depends on things management controls.

Mistakes that cost marks

Using the wrong EBITDA at exit. The exit multiple applies to the final year's EBITDA, not the entry figure.
Forgetting tax on the way to cash flow. Interest is deducted before tax; capex is not.
Subtracting the entry debt at exit. Subtract what is left after repayments, or net off the cash that built up.
Stopping at the multiple. Always convert to an IRR and say whether a sponsor would do the deal. Most funds look for 20% or more.
Going silent. Narrate each step. If you slip on arithmetic, the interviewer can see the method was right.

How to practice

Work each problem above on paper with the answer covered, then do it again out loud against a ten-minute timer. For fresh problems, the free paper LBO practice tool gives you a new one each time, checks your six numbers and shows the worked answer. Change one input at a time (the entry multiple, the leverage, the growth) and predict the direction of the IRR before you calculate.

For the spoken version of the concept, see our example answers to walk me through an LBO and what makes a good LBO candidate, and the wider private equity interview guide.

FAQ

What is a paper LBO?

A leveraged buyout model done by hand in an interview, usually in 5 to 10 minutes. You are given the entry price, the debt, a few operating assumptions and the exit, and you work out the sponsor's multiple of money and IRR.

Do you get a calculator in a paper LBO?

Usually not, which is why the prompts use round numbers. Round where it helps, say that you are rounding, and keep the structure exact.

How do you estimate IRR without a calculator?

Work out the money multiple, then use the memorized pairs for the holding period. Over five years, 2x is about 15%, 2.5x about 20% and 3x about 25%.

What is a good IRR in a paper LBO?

Sponsors generally target 20% or more, which is about 2.5x over five years. If your answer is well below that, say what would have to change: a lower price, more growth or more debt.

How is a paper LBO different from an LBO modeling test?

A paper LBO is done by hand in minutes and tests the logic. A modeling test is built in a spreadsheet, usually over one to three hours, with full statements and a debt schedule.

Paper LBO Example: 3 Worked Problems With Answers