Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
LBO Basics
5 conceptsLBO returns: MOIC, IRR, and where the return actually comes from
Sponsor equity at entry is enterprise value less debt. At exit, equity is exit enterprise value less whatever debt has not been repaid. Returns come from three places: EBITDA growth, multiple change, and debt paydown. Leverage does not create value — it concentrates whatever value the business creates into a smaller equity check.
Sources and uses
Every buyout starts with a table that must balance. Uses are what the money goes on: buying the equity, repaying the target’s existing debt, and paying the fees. Sources are where it comes from: new debt, sized as a multiple of EBITDA, and whatever is left over comes from the sponsor as equity — sometimes with management rolling part of their stake. The equity check is the plug. Everything the sponsor negotiates, from the purchase price to the leverage the lenders will allow, shows up as a change in that plug.
Paper LBO
A paper LBO is the whole buyout on the back of an envelope. Buy at a multiple with a fixed slug of debt. Each year the business earns EBITDA, pays interest on the debt it has, pays tax on what is left after depreciation, reinvests through capex, and every dollar that remains pays down debt. After five years, sell at a multiple of the bigger EBITDA, repay what debt is left, and the rest is the sponsor’s. Divide by what they put in for the multiple of money; take the fifth root for the IRR.
Debt schedule and the cash sweep
The debt schedule is where an LBO model earns its keep. Each year the business generates cash before debt service; interest comes out first, then the scheduled amortization on the term loan. What remains is excess cash, and the loan agreement says how much of it must be swept to repay the term loan early. Senior debt gets swept first because it is cheapest to the borrower and most protected for the lender; the notes sit untouched until maturity. Every dollar swept this year is interest not paid next year, so the schedule feeds itself.
Entry credit statistics
Lenders judge a buyout with a handful of ratios at closing. Leverage — debt over EBITDA, total and senior — says how many years of earnings it would take to repay them. Interest coverage — EBITDA over interest — says how much earnings can fall before the coupon is in doubt; the version after capex is the honest one. Loan-to-value says how far enterprise value could drop before the lenders are underwater, and the equity cushion is the same thing from the sponsor’s side. Each ratio can be turned around to give the most debt the business can carry under a given floor.