{"id":23823,"date":"2021-07-28T21:12:03","date_gmt":"2021-07-29T02:12:03","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=23823"},"modified":"2024-10-18T18:45:54","modified_gmt":"2024-10-18T23:45:54","slug":"paper-lbo-example","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/paper-lbo-example\/","title":{"rendered":"Paper LBO Example: Full Tutorial for Private Equity Interviews"},"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\">Paper LBO Example: Full Tutorial for Private Equity Interviews<\/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\/paper-lbo-example\/#Key_Tips_for_Paper_LBO_Tests\">Key Tips for Paper LBO Tests<\/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\/paper-lbo-example\/#Paper_LBO_Example_Real_Case_Study\">Paper LBO Example: Real Case Study<\/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\/paper-lbo-example\/#Paper_LBO_Step_1_%E2%80%93_Determine_the_End_Goal\">Paper LBO, Step 1 \u2013 Determine the End Goal<\/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\/paper-lbo-example\/#Paper_LBO_Step_2_%E2%80%93_Project_Revenue_and_EBITDA\">Paper LBO, Step 2 \u2013 Project Revenue and EBITDA<\/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\/paper-lbo-example\/#Paper_LBO_Step_3_%E2%80%93_Calculate_the_Annual_Free_Cash_Flow\">Paper LBO, Step 3 \u2013 Calculate the Annual Free Cash Flow<\/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\/paper-lbo-example\/#Paper_LBO_Step_4_%E2%80%93_Calculate_the_Exit_Proceeds\">Paper LBO, Step 4 \u2013 Calculate the Exit Proceeds<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/paper-lbo-example\/#The_%E2%80%9CPaper_LBO%E2%80%9D_in_Excel_Format\">The \u201cPaper LBO\u201d in Excel Format<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/paper-lbo-example\/#How_Important_is_the_Paper_LBO_in_Private_Equity_Interviews\">How Important is the Paper LBO in Private Equity Interviews?<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Paper LBO Definition:<\/strong> In a \u201cpaper LBO\u201d test, a private equity firm describes the leveraged buyout of a company and asks you to approximate the IRR or money-on-money multiple in the deal <em>without using Excel or a calculator<\/em>.<\/p><\/blockquote>\n<h2><span class=\"ez-toc-section\" id=\"Key_Tips_for_Paper_LBO_Tests\"><\/span><strong>Key Tips for Paper LBO Tests<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Paper LBOs are not true \u201cfinancial modeling tests\u201d in the same way that other Excel-based exercises are; they\u2019re more like extended mental math questions.<\/p>\n<p><strong>To succeed with paper LBO tests, you must <u>round and simplify the numbers<\/u> as much as possible so you can finish the calculations within the time limit (often 30 minutes or less).<\/strong><\/p>\n<p>It\u2019s also important to <strong>start with the end in mind<\/strong> so you can check yourself along the way.<\/p>\n<p>For example, if the PE firm is targeting a 25% IRR over 5 years, you should know that it corresponds to a <strong>3x multiple<\/strong> of the initial Investor Equity (see: our tutorial on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/how-to-calculate-irr-manually\/\" target=\"_blank\" rel=\"noopener\">how to calculate IRR manually<\/a>).<\/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<p>If you finish most of the exercise and you can tell that the deal will generate nothing close to a 3x multiple, you can immediately reject it.<\/p>\n<p>It\u2019s best to <strong>simplify the transaction assumptions<\/strong> as well, which means \u201cignore the transaction and financing fees\u201d and \u201cassume all deals are cash-free, debt-free\u201d (i.e., that the target company\u2019s Cash and Debt immediately go to 0 after the deal closes).<\/p>\n<p>Finally, you may assume that the Debt issued to fund the leveraged buyout stays the same or that 100% of the company\u2019s <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a> is used to repay the Debt principal.<\/p>\n<p>More complicated assumptions, such as \u201ccash flow sweeps,\u201d make it too difficult to track the numbers and calculate everything with pencil and paper.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Paper_LBO_Example_Real_Case_Study\"><\/span><strong>Paper LBO Example: Real Case Study<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/samples-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Mastery\/12-06-Paper-LBO-Case-30-Minutes.pdf\" target=\"_blank\" rel=\"noopener\">Click here to get the case study prompt for this exercise<\/a>.<\/p>\n<p>In short, the PE firm is acquiring a company for 10x EBITDA and using 6x Debt to fund the deal.<\/p>\n<p>They provide numbers for the company\u2019s revenue, EBITDA, cash flow line items, and the details of the Debt funding, such as the interest rates and principal repayments.<\/p>\n<p>The PE firm is targeting a 20% IRR over 5 years, so we have to complete this paper LBO and recommend or reject the deal based on this target.<\/p>\n<p><a href=\"https:\/\/samples-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Mastery\/12-06-Paper-LBO-Case-30-Minutes-Solutions.pdf\" target=\"_blank\" rel=\"noopener\">You can click here to get the full solutions to this exercise<\/a>, but we\u2019ll present the highlights below:<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Paper_LBO_Step_1_%E2%80%93_Determine_the_End_Goal\"><\/span><strong>Paper LBO, Step 1 \u2013 Determine the End Goal<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You should know that a 20% IRR over 5 years is approximately a <strong>2.5x multiple<\/strong> of invested capital because a 2x multiple is a ~15% IRR over 5 years, and a 3x multiple is a ~25% IRR.<\/p>\n<p><a href=\"https:\/\/samples-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Mastery\/12-06-Paper-LBO-Case-30-Minutes.pdf\" target=\"_blank\" rel=\"noopener\">The case document<\/a> gives us the company\u2019s initial EBITDA of $250 million.<\/p>\n<p>Since the company spends 60% of Revenue on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">COGS<\/a> and 15% on SG&amp;A, its EBITDA Margin equals 1 \u2013 60% \u2013 15% = 25%.<\/p>\n<p>So, the company\u2019s Revenue is $250 \/ 25% = $1,000.<\/p>\n<p>A 10x purchase multiple means a Purchase Enterprise Value of $2,500, and the deal is funded with 6x Debt and 4x Equity, so the Investor Equity is $2,500 * 40% = $1,000.<\/p>\n<p><strong>Therefore, this deal must generate $1,000 * 2.5x = $2,500 in Equity Proceeds to be viable.<\/strong><\/p>\n<p>We need to determine the Year 5 EBITDA and the Year 5 Debt to see if that happens.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Paper_LBO_Step_2_%E2%80%93_Project_Revenue_and_EBITDA\"><\/span><strong>Paper LBO, Step 2 \u2013 Project Revenue and EBITDA<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The case document gives us the initial numbers:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23824 size-full\" title=\"Paper LBO - Initial Numbers\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/01-Paper-LBO-Initial-Numbers.jpg\" alt=\"Paper LBO - Initial Numbers\" width=\"767\" height=\"138\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/01-Paper-LBO-Initial-Numbers.jpg 767w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/01-Paper-LBO-Initial-Numbers-300x54.jpg 300w\" sizes=\"(max-width: 767px) 100vw, 767px\" \/><\/p>\n<p>To project the Revenue figures, we can use approximations. For example:<\/p>\n<ul>\n<li>$1,000 * 5% &#8211;&gt; This is easy; it\u2019s an increase of $50.<\/li>\n<li>$1,050 * 7.5% &#8211;&gt; This is halfway between $52.5 and $105, so we can round it to $80.<\/li>\n<\/ul>\n<p>Once we have all the Revenue figures, we can use a similar strategy for EBITDA.<\/p>\n<p>For example, if we know the Year 1 Revenue is $1,050 and the EBITDA Margin is 24%, we can approximate the Year 1 EBITDA like this:<\/p>\n<p>$1,050 * 24% &#8211;&gt; $1,050 is a bit higher than $1,000, and 24% is a bit lower than 25%, so we can say the EBITDA is still $250.<\/p>\n<p>After completing these steps, we arrive at these estimates for Revenue and EBITDA:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23825 size-full\" title=\"Paper LBO - Revenue and EBITDA\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/02-Paper-LBO-Revenue-EBITDA.jpg\" alt=\"Paper LBO - Revenue and EBITDA\" width=\"790\" height=\"162\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/02-Paper-LBO-Revenue-EBITDA.jpg 790w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/02-Paper-LBO-Revenue-EBITDA-300x62.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/02-Paper-LBO-Revenue-EBITDA-768x157.jpg 768w\" sizes=\"(max-width: 790px) 100vw, 790px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Paper_LBO_Step_3_%E2%80%93_Calculate_the_Annual_Free_Cash_Flow\"><\/span><strong>Paper LBO, Step 3 \u2013 Calculate the Annual Free Cash Flow<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In the context of this simplified \u201cmodel,\u201d we can define Free Cash Flow like this:<\/p>\n<p><strong>Free Cash Flow<\/strong> = EBITDA \u2013 Interest \u2013 Taxes +\/\u2013 Change in Working Capital \u2013 CapEx \u2013 Purchases of Intangibles.<\/p>\n<p>CapEx, Purchases of Intangibles, and the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a> are all simple percentages of Revenue, so we can group them together:<\/p>\n<p>FCF = EBITDA \u2013 Interest \u2013 Taxes \u2013 \u201cOther Items.\u201d<\/p>\n<p>CapEx = \u20138% of Revenue, Intangible Purchases = \u20134%, and Change in WC = +2%.<\/p>\n<p>The first two are negative, and the Change in WC is positive, <strong>so \u201cOther Items\u201d represents negative 10% of Revenue.<\/strong><\/p>\n<p>We can round the numbers to units of 5 or 10, producing this chart:<img decoding=\"async\" class=\"aligncenter wp-image-23826 size-full\" title=\"Paper LBO - Initial Free Cash Flow\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/03-Paper-LBO-Free-Cash-Flow-Initial.jpg\" alt=\"Paper LBO - Initial Free Cash Flow\" width=\"769\" height=\"189\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/03-Paper-LBO-Free-Cash-Flow-Initial.jpg 769w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075106\/03-Paper-LBO-Free-Cash-Flow-Initial-300x74.jpg 300w\" sizes=\"(max-width: 769px) 100vw, 769px\" \/><\/p>\n<p>To calculate the Taxes and Interest, we need the Taxable Income first.<\/p>\n<p><strong>Taxable Income<\/strong> = EBIT \u2013 Interest, and <strong>EBIT<\/strong> = EBITDA \u2013 D&amp;A.<\/p>\n<p>The D&amp;A is simple, but the Interest changes each year as the company repays Debt.<\/p>\n<p>So, let\u2019s start with the D&amp;A: it\u2019s 5% of Revenue, so we can multiply each of the \u201cOther Items\u201d above by 50% to estimate it.<\/p>\n<p>The Interest Expense is the toughest part because the company <strong>repays<\/strong> its Term Loan balance over time, and many of the numbers are interdependent:<\/p>\n<p><strong>Interest:<\/strong> Depends on the Debt balance, but the Debt balance depends on FCF.<\/p>\n<p><strong>FCF:<\/strong> Depends on the Interest and Taxes.<\/p>\n<p><strong>Taxes:<\/strong> Depends on the Interest.<\/p>\n<p>We have to complete this process <strong>iteratively<\/strong>, starting with the Interest in Year 1.<\/p>\n<p>The initial Term Loan is $1,000, or $250 * 4, and the initial Senior Notes are $500, or $250 * 2, so the initial Interest Expense is $1,000 * 5% + $500 * 10% = $100:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23827 size-full\" title=\"Paper LBO - Initial Debt Schedule\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075105\/04-Paper-LBO-Debt-Schedule-Initial.jpg\" alt=\"Paper LBO - Initial Debt Schedule\" width=\"796\" height=\"398\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075105\/04-Paper-LBO-Debt-Schedule-Initial.jpg 796w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075105\/04-Paper-LBO-Debt-Schedule-Initial-300x150.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075105\/04-Paper-LBO-Debt-Schedule-Initial-768x384.jpg 768w\" sizes=\"(max-width: 796px) 100vw, 796px\" \/><\/p>\n<p>The Term Loans have 2% annual principal repayments, which might seem complicated at first.<\/p>\n<p>But since the company\u2019s FCF is higher than 2% * $1000 = $20 per year, we can combine the mandatory and optional repayments and assume that 100% of the company\u2019s FCF is used to repay Debt principal.<\/p>\n<p>The Senior Notes stay the same at $500 per year, so only the Term Loan balance changes.<\/p>\n<p>Once we have the Year 1 numbers, we can continue to Year 2, where Interest = 5% * $975 + 10% * $500.<\/p>\n<p>We round <em>all<\/em> the Interest numbers to units of 5 or 10 to simplify the math.<\/p>\n<p>The company\u2019s FCF never changes by a huge amount, so we use figures such as $25, $30, and $35 in each period.<\/p>\n<p>We also round all the Tax numbers to ones that end in 5 or 0, as shown below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23828 size-full\" title=\"Paper LBO - Next Step of the Debt Schedule\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/05-Paper-LBO-Debt-Schedule-Next-Step.jpg\" alt=\"Paper LBO - Next Step of the Debt Schedule\" width=\"783\" height=\"396\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/05-Paper-LBO-Debt-Schedule-Next-Step.jpg 783w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/05-Paper-LBO-Debt-Schedule-Next-Step-300x152.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/05-Paper-LBO-Debt-Schedule-Next-Step-768x388.jpg 768w\" sizes=\"(max-width: 783px) 100vw, 783px\" \/><\/p>\n<p>Once we have the numbers for Years 1 and 2, we go through the same process for each of the following years.<\/p>\n<p>It\u2019s impossible to track all these numbers in your head, so it\u2019s <strong>essential<\/strong> to write down the whole schedule on paper.<\/p>\n<p>The finished \u201c<a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/debt-schedule\/\" target=\"_blank\" rel=\"noopener\">Debt Schedule<\/a>\u201d looks like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23829 size-full\" title=\"Paper LBO - Finished Debt Schedule\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/06-Paper-LBO-Finished-Debt-Schedule.jpg\" alt=\"Paper LBO - Finished Debt Schedule\" width=\"792\" height=\"404\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/06-Paper-LBO-Finished-Debt-Schedule.jpg 792w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/06-Paper-LBO-Finished-Debt-Schedule-300x153.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075104\/06-Paper-LBO-Finished-Debt-Schedule-768x392.jpg 768w\" sizes=\"(max-width: 792px) 100vw, 792px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Paper_LBO_Step_4_%E2%80%93_Calculate_the_Exit_Proceeds\"><\/span><strong>Paper LBO, Step 4 \u2013 Calculate the Exit Proceeds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To finish, we need to calculate the Exit Enterprise Value, Exit Equity Value, money-on-money multiple, and IRR.<\/p>\n<p>We know the Year 5 EBITDA is approximately $300 and the Year 5 Exit Multiple is 12x (from the case document):<\/p>\n<p>$300 * 12 = $300 * 10 + $300 * 2 = $3,600 for the Exit Enterprise Value ($3.6 billion).<\/p>\n<p><strong>We have no information on the Cash balance, but we know it has NOT changed because all the company\u2019s FCF was used to repay the Term Loan<\/strong>.<\/p>\n<p>Since the remaining Debt in Year 5 is $1,360, the Exit Equity Value = $3,600 \u2013 $1,360 = $2,240; we can round this to $2,200 or $2,300.<\/p>\n<p>This range produces a multiple of 2.2x to 2.3x because $2,200 \/ $1,000 = 2.2x and $2,300 \/ $1,000 = 2.3x.<\/p>\n<p>To get a 20% IRR over 5 years, we need a 2.5x multiple on the $1,000 of Investor Equity.<\/p>\n<p>Therefore, this deal is <strong>not viable<\/strong>.<\/p>\n<p>The exact IRR here is probably between 15% and 20%, so it\u2019s not a bad outcome \u2013 but it\u2019s also below what the PE firm was targeting.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_%E2%80%9CPaper_LBO%E2%80%9D_in_Excel_Format\"><\/span><strong>The \u201cPaper LBO\u201d in Excel Format<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you want to \u201csee\u201d this paper LBO in Excel format, <a href=\"https:\/\/samples-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Mastery\/12-06-Paper-LBO-Case-30-Minutes.xlsx\" target=\"_blank\" rel=\"noopener\">click here to download the Excel recreation<\/a>, which has the exact numbers rather than approximations.<\/p>\n<p><strong>Note that it\u2019s completely pointless to build this model in Excel because the purpose of a paper LBO test is to finish it using <em>pencil and paper<\/em> and mental math.<\/strong><\/p>\n<p>If you use Excel, you might as well try a full-blown LBO modeling test that takes 2-3 hours to complete.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Important_is_the_Paper_LBO_in_Private_Equity_Interviews\"><\/span><strong>How Important is the Paper LBO in Private Equity Interviews?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Some private equity firms like to administer paper LBO tests, but you\u2019re more likely to get <em>real<\/em> Excel-based modeling tests and case studies.<\/p>\n<p>So, if you\u2019re going through the <a href=\"https:\/\/www.mergersandinquisitions.com\/private-equity-interviews\/\" target=\"_blank\" rel=\"noopener\">private equity interview process<\/a>, it\u2019s worth practicing a few paper LBO tests, but don\u2019t go through dozens of exercises or spend days on them.<\/p>\n<p>You should spend that time improving your story, reviewing and discussing your deal experience, and practicing real LBO modeling tests.<\/p>\n<p>Paper LBOs, when they do come up, tend to occur in earlier rounds of interviews and are mostly used to <em>eliminate<\/em> candidates.<\/p>\n<p>You\u2019re never going to win a private equity job offer because you ace a paper LBO test.<\/p>\n<p>But if you perform poorly, you could easily <em>lose<\/em> a job offer.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you&#8217;ll learn how to complete a &#8220;paper LBO&#8221; test in a private equity interview and how to approximate the IRR in a leveraged buyout using pencil and paper.<\/p>\n","protected":false},"featured_media":29323,"template":"","class_list":["post-23823","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\/23823","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\/29323"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=23823"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}