Interview questions
LBO interview questions
A leveraged buyout (LBO) is the purchase of a company funded largely with debt, which the company's own cash flow pays down over the holding period. Interviewers ask you to walk through the model, explain why leverage boosts returns, judge whether a business is a good candidate, and sometimes run a quick "paper LBO" with mental math.
Which LBO questions should you know?
The 3 below are free in Superday Room, each with a short answer, the mistake to avoid and a target time out loud.
Walk me through a basic LBO model.
1. Set the transaction assumptions: the purchase price (usually a multiple of EBITDA), the mix of debt and equity, interest rates and operating projections. 2. Build sources and uses: uses are the purchase price plus fees; sources are the debt and the private equity firm's equity check. 3. Adjust the balance sheet for the new debt, the new equity and any goodwill. 4. Project the three statements over the holding period and use free cash flow to pay down debt. 5. Assume an exit, usually after three to seven years at a multiple of EBITDA, and calculate the returns on the sponsor's equity: IRR and the multiple of invested capital.
Common mistake: Forgetting that paying down debt builds equity value, or assuming a hold of ten years or more.
Likely follow-up: Do a quick paper LBO in your head.
Why do private equity firms use leverage in an LBO?
Leverage reduces the equity check, so the same gain on the business is a bigger percentage return on the sponsor's equity: it magnifies the IRR. Interest is tax-deductible, and paying down debt with the company's own cash flow increases the equity's value over the hold. The trade-off is risk: more debt means more interest to cover and a higher chance of default if the business underperforms.
Common mistake: Saying more leverage lowers risk, or that it always reduces returns.
What makes a good LBO candidate?
Stable, predictable cash flow to service the debt; low CapEx needs; a strong market position; room to cut costs or improve operations; a capable management team; a reasonable purchase price; assets that can support borrowing; and a realistic exit through a sale or an IPO.
Common mistake: Choosing a fast-growing company that burns cash. Growth helps, but the debt has to be paid from cash flow.
How do you do a paper LBO in your head?
Work out the equity check, the equity value at exit and the multiple of the money, then convert it to an IRR. For example:
A private equity firm buys a company with $100 million of EBITDA at 10.0x, so the purchase price is $1,000 million (ignore fees). It funds the deal with $600 million of debt and a $400 million equity check.
Over five years, EBITDA grows to $150 million and the company's free cash flow pays down $300 million of debt, leaving $300 million. The firm sells at the same 10.0x multiple:
| Exit enterprise value: $150 × 10.0x | 1,500 |
| – Remaining debt | (300) |
| = Equity value at exit | 1,200 |
The sponsor turns $400 million into $1,200 million: a 3.0x multiple of invested capital. Over five years that's an IRR of about 25%, because 1.255 ≈ 3.05. Two rules of thumb make the mental math quick: doubling your money in five years is about a 15% IRR, and tripling it is about 25%.
Where did the $800 million gain come from? $500 million from EBITDA growth at a constant multiple, and $300 million from paying down debt. Being able to split returns like this is a common follow-up.
Three more worked paper LBOs, with fees, a lower exit multiple and a target return, plus an IRR table: Paper LBO practice examples →
Which firms ask these questions?
In Superday Room's bank, candidates reported 129 LBO questions from interviews at 36 named firms. The firms with the most reports: Moelis & Co. (13), Evercore (12), Guggenheim Partners (11), Bank of America (10), J.P. Morgan (9) and Greenhill & Co. (8). These are candidates' reports, counted November 1, 2026. Questions by firm →
Superday Room's full bank has more than 240 LBO questions. The 3 on this page are free to practice out loud; the rest come with the Recruiting Season Pass.