How to Answer “How do you model an add-on acquisition in an LBO?” in Private Equity Interviews
In Private Equity interviews, add-on acquisition LBO modeling is a common way to test whether you can extend a base LBO into a realistic buy-and-build, not just “add EBITDA” and move on. When you’re asked, “How do you model an add-on acquisition in an LBO?”, they want a structured workflow that stays assumption-driven and ties cleanly through the three statements, debt schedule, and returns.
At associate level, a strong answer also shows investing judgement: timing conventions, financing capacity, synergy ramp vs one-off cash costs, and how the add-on changes leverage, exit outcomes, and the equity story.
What PE Interviewers Test: Add-On Acquisition LBO Modeling
In private equity interview questions like this, interviewers are testing whether you can translate an add-on acquisition strategy into a model that actually balances and can be sensibly sensitised. They’re looking for clear modular thinking: keep the platform LBO intact, layer the add-on as a discrete set of assumptions and transaction mechanics, and then re-run cash flow, debt paydown, and returns.
On the technical side, it’s a bundle of LBO technical questions: sources & uses, debt and interest timing, purchase accounting/step-up (at least conceptually), working capital and capex implications, and synergy vs integration cost treatment. They want you to know where each item lives (EBITDA vs below EBITDA vs balance sheet) and how it affects cash.
They’re also assessing how you interpret output like an investor in an LBO case study: pro forma leverage and coverage after the add-on, downside resilience (liquidity and covenant headroom if relevant), and whether value creation is coming from multiple arbitrage, operational uplift, or simply more leverage.
Step-by-Step Guide to LBO Modeling for an Add-On Deal
- 1
Step 1: Set the scenario, close timing, and modelling convention
Start by anchoring the scenario inputs and the timeline: when the add-on closes (end-of-period vs mid-period), whether it’s a one-off or a series, and whether you’re running annual periods or adding a quarterly/monthly stub for accuracy. Timing drives partial-period EBITDA contribution, working capital needs at close, and the start of synergy realisation.
In an interview, explicitly state you’ll keep the base LBO unchanged and add a separate “Add-on module” with its own assumptions (purchase multiple/price, standalone EBITDA, growth/margins, capex, NWC intensity, synergy targets, integration costs). That framing signals control and auditability.
Call out one practical convention: if the model is annual, assume closing at year-end to simplify (no stub), or pro-rate revenue/EBITDA for a mid-year close; either is fine as long as you’re consistent across the P&L, cash flow, and interest/debt schedules.
- 2
Step 2: Build add-on Sources & Uses and connect financing to the LBO debt schedule
Next, model the transaction mechanics with a clear sources & uses. Uses typically include equity purchase price (enterprise value to equity bridge if needed), assumed/refinanced debt, transaction fees, financing fees, and any required cash at close. Sources usually include incremental debt (e.g., add-on/accordion term loan, delayed draw, revolver) and sponsor equity; sometimes platform cash if permitted.
Mechanically, link incremental debt draws into the debt schedule on the close date so interest expense updates correctly from that period onward. If you assume platform cash funds part of the deal, ensure the cash balance doesn’t go negative and that your cash sweep/minimum cash logic isn’t violated.
For decision logic (good for interviews), describe a rule: size incremental debt to a leverage or fixed-capacity limit (and liquidity comfort), then make equity the remainder. That makes the add-on equity cheque and returns consistent across sensitivities and avoids circular “plug” funding.
- 3
Step 3: Combine financials and model synergies, integration costs, and purchase accounting
Then move to operating consolidation. A clean build is: (1) platform standalone projections, (2) add-on standalone projections, (3) consolidation bridge that adds the add-on from close onward, (4) synergy and integration overlays.
Model synergies as incremental EBITDA with a ramp (e.g., 0%/50%/100% over time) and be explicit about what they represent (cost-out vs revenue) so margins don’t become a black box. Separately model one-time integration costs as cash items (often below EBITDA) so the add-on doesn’t look artificially accretive in early years.
Don’t forget reinvestment: incremental NWC and capex can be the difference between “accretive on EBITDA” and “cash generative.” If purchase accounting is in scope, mention a simple step-up approach: write-up creates incremental D&A (non-cash) and affects taxes; keep it pragmatic—interviewers care more that you know where the effects flow than that you build a perfect allocation under time pressure.
- 4
Step 4: Push through cash flow sweep, liquidity, and pro forma leverage path
Once combined EBITDA and cash flow are set, run the model’s LBO engine: operating cash flow → capex/NWC → free cash flow → mandatory amortisation → optional prepayments/cash sweep → ending debt and cash. The add-on changes both the cash generation and the capital structure, so pro forma leverage needs to be recalculated each period.
Be explicit about interest: new debt balance, pricing/spread, and any fees/OID amortisation if your model includes it. If you’re using a revolver for liquidity, confirm the add-on doesn’t inadvertently create revolver draws due to integration costs, seasonality, or an NWC build.
Add a quick reasonableness check you’d do in a live case: if leverage spikes post-close and doesn’t trend down despite synergy ramp, something is off (missing cash costs, too much debt funding, overly aggressive synergies, or understated capex/NWC).
- 5
Step 5: Update exit, calculate returns on total equity, and run sensitivities
Finally, update the exit to reflect the combined business: apply the exit multiple to combined EBITDA (platform + add-on + realised synergies), ensure you’re using a consistent EBITDA definition (run-rate vs reported), and compute equity value by subtracting net debt (including any deferred consideration).
Returns should be calculated on total sponsor equity invested, including the incremental add-on equity cheque. If you have time, add an attribution lens that maps to how PE teams talk about buy-and-build: value from multiple arbitrage (buy add-on cheaper than platform), synergy/operational uplift, and de-levering.
Close with the sensitivities you’d always run for financial modeling interview prep: add-on purchase multiple/price, synergy magnitude and timing, and financing mix/pricing. Optionally add integration cost overrun and NWC intensity as “real-life” checks.
Model Answer for an LBO Case Study Buy-and-Build
I model an add-on by keeping the base LBO intact and layering an add-on module that re-runs the consolidated financials, debt schedule, and returns. The workflow is: set timing and assumptions, build a sources & uses, consolidate operating results with synergies and one-offs, then push the combined cash flow through the LBO engine and update the exit.
First, I define the close date and modelling convention so I’m consistent on pro-rating and interest timing. Then I build an add-on sources & uses: purchase price (often as a multiple of standalone EBITDA), fees, and any assumed debt, funded by incremental term debt/revolver and sponsor equity. I link any new debt draws into the debt schedule at close so interest expense and mandatory amortisation update correctly.
On operations, I forecast the add-on standalone P&L and cash flow and consolidate it with the platform from close onward. I model synergies as an incremental EBITDA uplift with a ramp, and I model integration costs as explicit cash items so early-year cash flow isn’t overstated. I also include incremental working capital and capex, because that’s usually where add-ons look better on EBITDA than on cash.
After that, I run combined free cash flow through the sweep to get updated ending debt, cash, and pro forma leverage. At exit, I apply the exit multiple to combined EBITDA including realised synergies, subtract net debt, and compute IRR and MOIC on total equity invested including the add-on equity cheque. I sanity-check that leverage de-risks over time and I sensitivity-test purchase multiple, synergy timing, and the funding mix.
- Lead with a repeatable structure (timing → sources & uses → consolidation → debt/returns).
- Name the cash-flow “gotchas” (integration costs, NWC, capex) to avoid paper accretion.
- Make the financing rule-based (leverage/capacity limit, then equity remainder) for clean sensitivities.
- End with investor interpretation: pro forma leverage path and key sensitivities.
Common LBO Technical Questions: Add-On Modelling Pitfalls
- Adding the add-on’s EBITDA but not modelling purchase price, fees, and financing, so returns are meaningless.
- Ignoring close-date timing (mid-year stub) and overstating first-year contribution and de-levering.
- Baking synergies straight into margins with no ramp and no one-time integration cash costs.
- Using platform cash to fund the deal without checking minimum cash, revolver availability, or sweep logic.
- Applying the exit multiple to an inconsistent EBITDA definition (e.g., including unrealised synergies or excluding the add-on).
- Forgetting incremental working capital and capex, which can flip the add-on from cash generative to cash consumptive.
Follow-Ups Seen in Private Equity Interview Questions
How do you choose debt vs equity to fund the add-on?
I size debt to a leverage/capacity and liquidity constraint first (and check coverage/downside), then fund the remainder with equity so the model stays consistent across cases.
How do you model multiple arbitrage in a buy-and-build?
Buy the add-on at its entry multiple on standalone EBITDA, but value the combined business at exit using the platform’s exit multiple on combined EBITDA; the spread is the arbitrage (if integration is credible).
Where do synergies and integration costs go in the model?
Synergies typically show up as incremental EBITDA with a ramp; integration costs are usually one-time cash items modelled below EBITDA so free cash flow and debt paydown reflect reality.
What if there’s an earn-out or seller note as part of consideration?
Treat it as deferred consideration: a liability at close with scheduled payments (and interest if applicable), reducing future cash flow and increasing net debt at exit until paid.
What are the key sensitivities for add-on acquisition LBO modeling?
Add-on purchase multiple/price, synergy magnitude and timing, and the financing mix/pricing; I also test integration cost overruns and NWC intensity for downside realism.
Financial Modeling Interview Prep for Add-On Acquisitions
- Practise a 2–3 minute “say it out loud” answer that always follows the same sequence: timing → sources & uses → consolidation → debt/returns (core to LBO interview prep).
- Build a simple mental template: add-on assumptions table, sources & uses, synergy ramp + one-offs, and hard links to the debt schedule and exit.
- Rehearse two quick sanity checks: (1) does cash ever go negative / revolver unexpectedly draw, and (2) does leverage actually de-risk post-add-on?
- Use AceTheRound to drill the follow-ups that typically break candidates: mid-year close conventions, debt capacity logic, and explaining whether the return is driven by arbitrage vs operations.
Ready to practice with AceTheRound?
Create an account to unlock AI mock interviews, feedback, and the full prep library.