Paper LBO 101
The LBO, or the Leveraged Buy Out, is usually one of the first technical skills you think of for a private equity
interview. An LBO is an acquisition where a significant part of the purchase price is funded with debt. The
remaining portion is funded with equity by the financial sponsors (private equity “PE” investors = LBO shop). This
exercise is often a prerequisite for you to be successful in interviews but it can come in various forms, but one
that stands out for its foundational significance is the Paper LBO. The LBO could be presented very subtly in the
form of conversational interview questions, in a take-at-home LBO Excel assignment, or in the famous paper LBO.
In this article, we focus on the paper LBO which gives you the foundations for all variations of the LBO.
Stripped down to the foundations
The Paper LBO isn't like the usual Excel-driven model. It's more like a brain teaser you solve with just a pen and
paper. Why use paper? Because it simplifies the tricky parts of an LBO, focusing on the most important ideas
without relying on Excel.
A typical Paper LBO adheres to specific rules:
● Pen and Paper Only: No Excel—just you and your writing tools.
● Explain Your Work: Transparency is key; interviewers want to understand your thought process.
● Within a Few Minutes: It's a race against time, with simplicity as the goal.
● Simple Numbers: Complexity takes a back seat; the focus is on the essentials.
● Liberally Round Numbers: Precision is good, but in a Paper LBO, rounding is a friend.
To navigate the Paper LBO successfully, you need to grasp fundamental concepts:
● Enterprise Value: The cornerstone of any LBO.
● Sources and Uses: Understanding where the money comes from and where it's going.
● Forecasting Financials: Projecting the future based on provided assumptions.
● Building to Free Cash Flow: The lifeblood of the LBO.
● Approximating IRR (Rule of 72): Triangulating investment returns.
Five Key Steps to Conquer the Paper LBO Model:
● Transaction Assumptions & Entry: Crunching the numbers on purchase price, debt, and equity.
● Sources & Uses: Tracking the flow of money—where it comes from and where it goes.
● Income Statement & Financial Projection: Forecasting the financial trajectory over the holding period.
● Cash Flow Calculation: Determining the lifeblood of the LBO—Free Cash Flow.
● Exit & Returns Analysis: Unveiling the endgame, calculating returns, and approximating IRR.
The LBO, or the Leveraged Buy Out, is usually one of the first technical skills you think of for a private equity
interview. An LBO is an acquisition where a significant part of the purchase price is funded with debt. The
remaining portion is funded with equity by the financial sponsors (private equity “PE” investors = LBO shop). This
exercise is often a prerequisite for you to be successful in interviews but it can come in various forms, but one
that stands out for its foundational significance is the Paper LBO. The LBO could be presented very subtly in the
form of conversational interview questions, in a take-at-home LBO Excel assignment, or in the famous paper LBO.
In this article, we focus on the paper LBO which gives you the foundations for all variations of the LBO.
Stripped down to the foundations
The Paper LBO isn't like the usual Excel-driven model. It's more like a brain teaser you solve with just a pen and
paper. Why use paper? Because it simplifies the tricky parts of an LBO, focusing on the most important ideas
without relying on Excel.
A typical Paper LBO adheres to specific rules:
● Pen and Paper Only: No Excel—just you and your writing tools.
● Explain Your Work: Transparency is key; interviewers want to understand your thought process.
● Within a Few Minutes: It's a race against time, with simplicity as the goal.
● Simple Numbers: Complexity takes a back seat; the focus is on the essentials.
● Liberally Round Numbers: Precision is good, but in a Paper LBO, rounding is a friend.
To navigate the Paper LBO successfully, you need to grasp fundamental concepts:
● Enterprise Value: The cornerstone of any LBO.
● Sources and Uses: Understanding where the money comes from and where it's going.
● Forecasting Financials: Projecting the future based on provided assumptions.
● Building to Free Cash Flow: The lifeblood of the LBO.
● Approximating IRR (Rule of 72): Triangulating investment returns.
Five Key Steps to Conquer the Paper LBO Model:
● Transaction Assumptions & Entry: Crunching the numbers on purchase price, debt, and equity.
● Sources & Uses: Tracking the flow of money—where it comes from and where it goes.
● Income Statement & Financial Projection: Forecasting the financial trajectory over the holding period.
● Cash Flow Calculation: Determining the lifeblood of the LBO—Free Cash Flow.
● Exit & Returns Analysis: Unveiling the endgame, calculating returns, and approximating IRR.
