Walk Me Through an LBO: Interview Answer and Full Framework

"Walk me through an LBO" is the core PE technical and a common IB follow-up once valuation basics are cleared. Interviewers want a structured tour of the model, not a history of leveraged buyouts. If you can narrate entry, financing, operations, debt paydown, exit, and returns in about 90 seconds, then survive follow-ups, you clear a huge filter.

The 90-second answer

"A leveraged buyout is buying a company using a mix of debt and equity. I start with entry enterprise value from EBITDA times an entry multiple, then build sources and uses so debt tranches plus sponsor equity plus any rollover fund the purchase price, fees, and refinancing needs. I project the operating case to free cash flow, run a debt schedule with interest, amortization, and optional prepay from excess cash, then exit at an exit multiple on forward EBITDA. Exit equity is exit EV minus net debt. MoIC is exit equity over entry equity, and IRR is the annualized return over the hold. Returns come from deleveraging, EBITDA growth, and multiple change."

Stop. Let them dig.

The full framework

Step 1: Entry valuation

Most prompts give LTM EBITDA and an entry multiple.

Entry EV = Entry EBITDA × Entry Multiple

Clarify LTM vs NTM if both appear. Paying "10x" of the wrong earnings base is a classic miss.

Step 2: Sources and uses

Uses (what you need at close):

• Equity purchase price / enterprise value economics (cash-free debt-free conventions matter)
• Refinance existing debt (often)
• Transaction fees and financing fees
• Minimum cash left on the balance sheet

Sources (how you fund it):

• New debt tranches (revolver, term loan, notes, mezz)
• Sponsor equity
• Management rollover
• Seller note (sometimes)

Sources must equal uses. Sponsor equity is often the plug.

Step 3: Operating case and free cash flow

You need a path from EBITDA to cash available for debt paydown:

EBITDA
− D&A (if you need EBIT)
− Cash interest (careful with timing / circularity)
− Taxes
− CapEx
− ΔNWC
± other
= Free cash flow available for debt repayment (definition varies by model)

In interviews, say your FCF definition. Do not pretend every shop uses the identical bridge.

Step 4: Debt schedule

Walk senior to junior:

1. Beginning balance
2. Draws / mandatory amortization
3. Optional prepay (cash sweep)
4. Interest (cash vs PIK if relevant)
5. Ending balance

Revolver usually sits at the top of the sweep after minimum cash. Term loans amortize. Bonds may be interest-only with bullet maturity.

Step 5: Exit

Exit EV = Exit EBITDA × Exit Multiple
Exit Equity ≈ Exit EV − Ending Net Debt (+/− other adjustments)

Flat exit multiple is a common base case. Compression is a stress. Expansion needs a story.

Step 6: Returns

MoIC = Exit Equity ÷ Entry Equity
IRR ≈ MoIC^(1/n) − 1   (terminal-only shortcut)

Then attribution:

• Deleveraging: debt paydown increases equity value
• EBITDA growth: more earnings at a given multiple
• Multiple expansion / compression: exit vs entry multiple

Follow-ups you should expect

Weak vs strong walkthroughs

Paper LBO vs full walkthrough

The verbal walkthrough is the map. A paper LBO is the same map with numbers and mental math. A modeling test is the map in Excel under time. Learn them as one skill with three interfaces.

Practice plan

Day 1: memorize the 90-second script until boring.
Day 2: add a numeric paper LBO on top.
Day 3: explain debt schedule mechanics without notes.
Day 4: attribution on a finished case (flat multiple vs compression).
Day 5: mock with interruptions every 20 seconds.

Practice on SheetRank

Build full LBOs until sources equal uses and returns reconcile without hoping. Apollo-style cases grade the live model so your verbal walkthrough is describing work you have actually done.