Paper LBO: How to Complete One in Under 5 Minutes

What Is a Paper LBO?

A paper LBO is exactly what it sounds like: completing a leveraged buyout analysis using only a pen, paper, and your brain. No Excel, no calculator (usually), and no time to second-guess yourself. You'll typically have 5 to 10 minutes to work through the problem and arrive at an IRR and MOIC.

This exercise appears in nearly every private equity interview process and increasingly in investment banking interviews, particularly for groups with significant sponsor coverage. The paper LBO tests your ability to think like an investor under pressure while demonstrating command of LBO mechanics without relying on spreadsheet formulas.

The good news? Paper LBOs follow a predictable structure, and with the right framework, you can complete them confidently every time. The key is understanding what shortcuts to use, what to calculate first, and how to avoid common traps that waste precious minutes.

Why Interviewers Love Paper LBOs

Paper LBOs are popular because they test multiple competencies simultaneously:

Unlike a take-home modeling test where you have hours to build something polished, the paper LBO reveals how you think in real-time. Interviewers watch your process as much as your answer. A candidate who arrives at approximately the right IRR through a logical framework impresses more than one who gets the exact number through a disorganized approach.

Understanding the full LBO modeling framework provides the foundation, but paper LBOs require you to distill that knowledge into rapid mental calculations.

The Three-Step Paper LBO Framework

Every paper LBO follows the same core structure. Master these three steps, and you can tackle any prompt:

Step 1: Calculate the Entry Equity Check

Before you can calculate returns, you need to know how much equity the sponsor is investing. This requires building a quick Sources and Uses table.

The formula is simple:

For example, if you're buying a company at $500 million enterprise value with $300 million of debt financing and $15 million in fees, your equity check is:

Always confirm the key inputs before calculating. Spend the first 30 seconds of your paper LBO verifying: purchase price, purchase multiple, LTM EBITDA, and the debt financing structure. Getting these wrong ruins everything downstream.

Step 2: Project Cash Flows and Calculate Exit Equity Value

This step determines what the sponsor's equity is worth at exit. You need two things: the exit enterprise value and the remaining debt at exit.

Calculating Exit Enterprise Value:

The prompt will typically give you either a specific exit multiple or tell you to assume the same multiple as entry. The calculation is straightforward:

If EBITDA grows from $50 million at entry to $75 million at exit (Year 5), and you exit at 10x:

Calculating Remaining Debt:

You need to track how much debt remains at exit. This requires projecting Levered Free Cash Flow (FCF available for debt paydown) each year:

For paper LBOs, you'll often get simplified assumptions like "assume all free cash flow goes to debt paydown" or specific annual debt paydown amounts. If you need to calculate it, use rough estimates:

Tip: If the math gets complex, round aggressively. In a paper LBO, being within $10-20 million on a $500 million deal is perfectly acceptable.

Exit Equity Value:

If your exit EV is $750 million and you've paid debt down from $300 million to $150 million:

Get the complete guide: Download our comprehensive 160-page PDF covering LBO mechanics, paper LBO examples, and all technical frameworks; access the IB Interview Guide for step-by-step walkthroughs.

Step 3: Calculate MOIC and IRR

Now you have everything needed to calculate returns.

MOIC (Multiple of Invested Capital):

Using our example:

IRR (Internal Rate of Return):

This is where the IRR shortcuts become essential. Memorize these approximations for a 5-year hold:

For a 2.8x MOIC over 5 years, you'd interpolate between 2.5x (20%) and 3.0x (25%), arriving at approximately 23% IRR.

Adjusting for different holding periods:

The shortcuts above assume a 5-year hold. If the holding period differs:

For a 3-year hold, a 2.0x MOIC is approximately 26% IRR (compared to 15% over 5 years). Understanding what makes a good LBO candidate helps you recognize when deals can achieve faster exits and higher IRRs.

A Complete Paper LBO Example

Let's work through a full example to see the framework in action.

The Prompt:

A PE firm is acquiring a manufacturing company for 8x LTM EBITDA. LTM EBITDA is $100 million. The deal is financed with 60% debt at a 7% interest rate. Assume EBITDA grows 5% annually, the company generates $30 million in levered FCF annually (after interest, taxes, and CapEx), all FCF goes to debt paydown, and the exit multiple equals the entry multiple. The holding period is 5 years. Calculate IRR and MOIC.

Step 1: Entry Equity Check

(Ignoring transaction fees for simplicity, though in practice you'd add 2-3%.)

Step 2: Exit Equity Value

Exit EBITDA (5% annual growth for 5 years):

Using the quick compound growth approximation: 5% for 5 years ≈ 27.6% total growth

Exit Enterprise Value:

Remaining Debt:

$30M annual paydown × 5 years =$150M total paydown

Exit Equity Value:

Step 3: Returns

Using the IRR shortcut (2.0x ≈ 15%, 2.5x ≈ 20%), a 2.17x over 5 years is approximately 17% IRR.

Presenting your answer: "Based on my analysis, the sponsor would achieve approximately a 2.2x MOIC and a 17% IRR over the 5-year hold. The returns are driven primarily by EBITDA growth from $100 million to$128 million, plus $150 million of debt paydown. The entry and exit multiples are flat at 8x, so there's no multiple expansion contributing to returns."

Essential Mental Math Shortcuts

Paper LBOs require quick mental calculations. Here are the shortcuts that save the most time:

Compound Growth Approximations

Instead of calculating $(1.05)^5$ precisely, use these approximations:

The Rule of 72 also helps: years to double = 72 ÷ growth rate. At 10% growth, you double in approximately 7 years.

Quick Interest Calculations

If debt pays down over time, use the average balance for a rough estimate: if debt starts at $500M and ends at $300M, average is $400M, so average annual interest at 8% ≈ $32M.

Division Shortcuts for MOIC

Round to make division easier, then adjust. If the real numbers are $694M ÷ $320M, round to $700M ÷ $320M ≈ 2.2x.

Understanding how to calculate WACC and other valuation metrics builds the broader technical foundation that makes these shortcuts intuitive.

Common Mistakes to Avoid

1. Forgetting Transaction Fees

Many candidates calculate equity check as simply Purchase Price minus Debt. But transaction fees (typically 2-3% of purchase price) increase the uses of funds and thus the equity required. On a $1 billion deal, $25 million in fees can move your MOIC by 0.1x or more.

2. Using Wrong EBITDA for Exit

Always use exit EBITDA (after growth) for the exit enterprise value calculation, not entry EBITDA. This is a surprisingly common error under time pressure.

3. Confusing Enterprise Value and Equity Value

If the prompt gives you equity value (what the sponsor pays for the equity), you don't subtract debt to find the equity check. The equity value already reflects net debt. Read the prompt carefully to identify which figure you're given.

4. Over-Complicating the Math

Paper LBOs reward approximation. If you spend 4 minutes trying to calculate the exact present value of an irregular cash flow stream, you won't finish. Round aggressively and move forward.

5. Not Stating Your Assumptions

When presenting your answer, briefly mention key assumptions: "I assumed flat multiples, 5% EBITDA growth, and roughly $30 million annual FCF for debt paydown." This shows structured thinking and gives the interviewer context for your numbers.

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Advanced Paper LBO Considerations

Once you've mastered the basics, be prepared for these complications:

Dividend Recapitalizations

Some prompts include a dividend recap where the company takes on additional debt mid-hold to pay a dividend to sponsors. This increases returns because you're getting cash out early:

Multiple Expansion/Contraction

If you buy at 8x and sell at 10x, the multiple expansion itself creates value. Conversely, if you buy at 10x and sell at 8x, you need more EBITDA growth to achieve the same returns. Always note whether the prompt specifies entry and exit multiples are the same.

Roll-Over Equity

Sometimes management or existing shareholders roll over a portion of their equity into the new deal. This reduces the sponsor's equity check and can improve MOIC. Ensure you only calculate returns on the new equity invested, not the rolled equity.

These scenarios tie directly into broader PE case study analysis where you evaluate full investment opportunities rather than just running quick return calculations.

How to Practice Paper LBOs

Consistent practice is the only way to build speed and accuracy:

Start with simple prompts: Use round numbers ($100M EBITDA, 10x multiple, 50% debt) and practice until you can complete these in under 3 minutes.

Add complexity gradually: Introduce transaction fees, varying growth rates, and different holding periods. Time yourself and aim to finish within 5 minutes.

Practice without a calculator: Force yourself to do all math mentally. This builds the mental math muscle you'll need in interviews.

Verbalize your process: Practice explaining your work as you go. Interviewers want to see your thinking, not just the answer.

Get feedback: Work with a partner who can play the interviewer role, ask follow-up questions, and identify gaps in your explanations.

Understanding the broader PE interview process helps you recognize where paper LBOs fit alongside case studies, technical questions, and behavioral discussions.

What Interviewers Ask After Your Paper LBO

Expect follow-up questions that test your depth:

These questions assess whether you truly understand the drivers of LBO returns or simply memorized a formula. Being able to discuss exit strategies and value creation levers demonstrates genuine investor thinking.

Key Takeaways

Conclusion

The paper LBO is one of the most predictable interview exercises in private equity recruiting. Unlike behavioral questions where answers vary widely, paper LBOs have a defined structure and calculable answers. This predictability is your advantage.

Master the three-step framework, memorize the IRR shortcuts, and practice until the process becomes automatic. When you sit down with a pen and paper in your interview, you'll approach the exercise with confidence rather than anxiety.

The candidates who excel at paper LBOs aren't necessarily the fastest at mental math. They're the ones who work systematically, round when appropriate, and communicate their thinking clearly. Focus on demonstrating structured problem-solving and investor intuition, and the right answer will follow.