The paper LBO: a model you can explain on a page.

Write down the assumptions first

Assume a business with EBITDA of $40 million is acquired for 10.0× EBITDA. Entry enterprise value is $400 million. There is no existing excess cash, no transaction or financing fee, and no other claim to adjust for. The purchase is funded by $240 million of debt and $160 million of sponsor equity.

Assume a five-year holding period with no interim distributions. By exit, EBITDA reaches $50 million and the business has repaid $100 million of debt after all cash expenses, taxes, interest, investment and working-capital needs. This repayment is a supplied assumption; it is not inferred from EBITDA alone.

Turn exit enterprise value into equity proceeds

At the same 10.0× multiple, exit enterprise value is $500 million. Debt has fallen to $140 million. With no excess cash or other claims at exit, equity proceeds are $360 million.

The sponsor invested $160 million and receives $360 million. The money multiple is 2.25×. With one entry outflow, one exit inflow and no interim cash flows, the five-year IRR is approximately 17.6%.

Explain where the return came from

Enterprise value grew by $100 million because EBITDA increased at an unchanged multiple. Debt paydown added another $100 million to the equity value. Together, those movements explain why equity increased from $160 million to $360 million.

There was no multiple expansion in the base case. Calling the entire gain ‘leverage’ would skip the operating improvement and cash generation that supported it.

Run the downside before you finish

At an 8.0× exit multiple on the same $50 million of EBITDA, enterprise value falls to $400 million. Subtracting $140 million of debt leaves $260 million of equity. The money multiple becomes 1.625× and the five-year IRR is approximately 10.2%.

If cash generation also weakens, debt paydown may be lower. Change that assumption separately so you can explain whether the downside is coming from operating performance, valuation or both.

Four mistakes worth catching in rehearsal

Keep the calculation legible enough that an interviewer can follow each link. State what you have simplified rather than quietly assuming away a missing input.

• Using exit enterprise value as the sponsor’s proceeds without subtracting debt.
• Treating EBITDA as cash available to repay debt.
• Counting an interim distribution both as proceeds and as retained cash at exit.
• Giving an IRR without identifying the holding period or cash-flow timing.