{"id":21966,"date":"2020-02-19T19:37:13","date_gmt":"2020-02-20T00:37:13","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21966"},"modified":"2024-10-18T18:59:25","modified_gmt":"2024-10-18T23:59:25","slug":"lbo-interview-questions","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/","title":{"rendered":"LBO Model Interview Questions: What to Expect (18:48)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">LBO Model Interview Questions: What to Expect<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Will_you_get_LBO-related_questions_in_interviews\">Will you get LBO-related questions in interviews?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Question_1_LBO_Model_Walkthrough\">Question #1: LBO Model Walkthrough<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Question_2_Ideal_LBO_Candidates\">Question #2: Ideal LBO Candidates<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Question_3_Approximating_IRR\">Question #3: Approximating IRR<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Question_4_Back-Solving_for_Assumptions\">Question #4: Back-Solving for Assumptions<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/lbo-interview-questions\/#Question_5_Approximating_IRR_in_an_IPO_Exit\">Question #5: Approximating IRR in an IPO Exit<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Will_you_get_LBO-related_questions_in_interviews\"><\/span>Will you get LBO-related questions in interviews?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Yes, possibly, but full case studies are unlikely unless you&#8217;re interviewing for PE roles or more advanced IB roles.<\/p>\n<p>Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they&#8217;re more likely to give you *simple* cases and numerical tests rather than complex ones.<\/p>\n<p>A typical progression for LBO models might be as follows:<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Question_1_LBO_Model_Walkthrough\"><\/span>Question #1: LBO Model Walkthrough<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront.&#8221;<\/p>\n<p>In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins.<\/p>\n<p>In Step 2, you create a Sources &amp; Uses schedule to calculate the Investor Equity paid by the PE firm.<\/p>\n<p>In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill.<\/p>\n<p>In Step 4, you project the company&#8217;s statements, or at least its cash flow, and determine how much Debt it repays each year.<\/p>\n<p>Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Question_2_Ideal_LBO_Candidates\"><\/span>Question #2: Ideal LBO Candidates<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Price is the most important factor because almost any deal can work at the right price \u2013 but if the price is too high, the chances of failure increase substantially.<\/p>\n<p>Beyond that, stable and predictable cash flows are important, there shouldn&#8217;t be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion.<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Question_3_Approximating_IRR\"><\/span>Question #3: Approximating IRR<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt.<\/p>\n<p>The company&#8217;s EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What&#8217;s the IRR?&#8221;<\/p>\n<p>Initial Investor Equity = $100 million * 10 * 40% = $400 million<\/p>\n<p>Exit Enterprise Value = $150 million * 9 = $1,350 million<\/p>\n<p>Debt Remaining Upon Exit = $600 million \u2013 $250 million = $350 million<\/p>\n<p>Exit Equity Proceeds = $1,350 million \u2013 $350 million = $1 billion<\/p>\n<p>IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it&#8217;s ~20%.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Question_4_Back-Solving_for_Assumptions\"><\/span>Question #4: Back-Solving for Assumptions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA.<\/p>\n<p>You use 5x Debt \/ EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?&#8221;<\/p>\n<p>Initial Investor Equity = $100 * 10 * 50% = $500<\/p>\n<p>20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%)<\/p>\n<p>Exit Equity Proceeds = $500 * 2.5 = $1,250<\/p>\n<p>Remaining Debt = $250, so Exit Enterprise Value = $1,500<\/p>\n<p>Required EBITDA = $150, since $1,500 \/ 10 = $150<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Question_5_Approximating_IRR_in_an_IPO_Exit\"><\/span>Question #5: Approximating IRR in an IPO Exit<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt.<\/p>\n<p>The company&#8217;s EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What&#8217;s the IRR?&#8221;<\/p>\n<p>Initial Investor Equity = $200 * 8 * 50% = $800<\/p>\n<p>Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400<\/p>\n<p>&#8220;Average Year&#8221; to Exit = 1\/3 * 3 + 1\/3 * 4 + 1\/3 * 5 = 4 years<\/p>\n<p>IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25%<\/p>\n<p>Approximate IRR: ~35% (This one&#8217;s a bit off \u2013 see Excel.)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you&#8217;ll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts.<\/p>\n","protected":false},"featured_media":21967,"template":"","class_list":["post-21966","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-leveraged-buyouts-and-lbo-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21966","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21967"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21966"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}