Walk me through an LBO
Explain how a financial sponsor buys, capitalizes, and exits a company to target returns.
Direct answer
Outline the deal setup, sources and uses, operating projections, debt repayment, and exit that produce the sponsor’s returns.
Walk through the structured answer
Set purchase assumptions
Use entry EBITDA and an entry multiple to determine enterprise value; layer on fees and any rollovers.
Build sources and uses
Allocate equity, various debt tranches, and fees; ensure total sources equal uses to fund the acquisition.
Project operations and cash flow
Forecast revenue, EBITDA, CapEx, and working capital; derive levered free cash flow to pay down debt.
Model debt schedule
Track mandatory and optional amortization, cash sweeps, interest expense, and PIK features if relevant.
Exit and returns
Apply an exit multiple to terminal EBITDA, deduct remaining debt, and compute MOIC/IRR to equity investors.
Pitfalls to avoid
- Forgetting to include financing fees as an asset and amortizing them.
- Using growth assumptions that contradict planned operational improvements.
- Not testing sensitivities around exit multiple and leverage to see IRR ranges.
Follow-up angles
- Which drives returns more: multiple expansion or deleveraging in this case?
- How would a PIK toggle change the cash flows?
- What covenant would worry you most here?
Keep drilling the set
Put this answer into a mock interview
Launch the simulator or jump into the dedicated prep path to rehearse this flow with real-time feedback.