A leveraged buyout worked out with pen and paper, or in your head, in a few minutes, to find the private equity firm's return from an entry price, the debt used, growth and an exit multiple.

How do you calculate IRR in a paper LBO?

Divide exit equity by entry equity for the multiple of invested capital (MOIC), then convert: over five years, 2.0x is about 15%, 2.5x about 20% and 3.0x about 25%. Exactly, IRR = MOIC^(1/years) − 1.

Where do LBO returns come from?

EBITDA growth, debt paydown and any change in the multiple between entry and exit, less fees.

What IRR is 2x over 3 years?

About 26%. Over four years 2x is about 19% and over five about 15%; 3x is about 44%, 32% and 25% over three, four and five years. Each is MOIC^(1/years) − 1, rounded.

Guide

Paper LBO: how to do one in your head, with six practice examples

Updated November 1, 2026

A paper LBO is a leveraged buyout worked out with pen and paper, or in your head, in a few minutes. You get an entry multiple, the debt and equity used, how the business grows and an exit multiple, and you're asked for the private equity firm's return. Work it in five steps: purchase price; debt and equity at entry; cash generated and debt paid down over the hold; equity value at exit; then the multiple of invested capital (MOIC) and the IRR. Over five years, 2.0x is about a 15% IRR and 3.0x is about 25%.

Practice “Walk me through a basic LBO model” out loud. Answer it now →

How do you do a paper LBO?

Work from the purchase price to the IRR in five steps, and say each one out loud:

Purchase price. EBITDA × the entry multiple gives enterprise value. Add any fees the sponsor pays.
Sources. Debt is usually given as a multiple of EBITDA or a share of the price. The sponsor's equity = price + fees − debt.
Cash over the hold. Free cash flow ≈ EBITDA − interest − taxes − CapEx − the increase in working capital. Assume all of it repays debt unless told otherwise.
Exit. Exit EBITDA × the exit multiple gives exit enterprise value; subtract the debt left (and add any cash) to get the equity value.
Returns. MOIC = exit equity ÷ entry equity. Convert it to an IRR with the table below: IRR = MOIC^1/years − 1.

How do you estimate the IRR in your head?

Convert the multiple of invested capital with a few anchors: over five years, 2.0x is about 15% and 3.0x about 25%. The full grid:

Paper LBO IRR table: IRR for a multiple of invested capital (MOIC) over the holding period, computed as MOIC^1/years − 1 and rounded to one decimal
MOIC	3 years	4 years	5 years
1.5x	14.5%	10.7%	8.4%
2.0x	26.0%	18.9%	14.9%
2.5x	35.7%	25.7%	20.1%
3.0x	44.2%	31.6%	24.6%
4.0x	58.7%	41.4%	32.0%

Two rules cover most interviews: over five years, doubling your money is about a 15% IRR and tripling it about 25%. For anything in between, interpolate and say so: "2.3x over five years, so a little under 20%."

The six numbers worth memorizing, rounded to whole percents:

IRR rule of thumb for 2x and 3x money-on-money, computed as MOIC^1/years − 1 and rounded
Money-on-money	3 years	4 years	5 years
2x	~26%	~19%	~15%
3x	~44%	~32%	~25%

These are math, not data: each cell is the yearly rate that compounds to the multiple over the period. A shortcut for 2x is the rule of 72: 72 ÷ 4 years ≈ 18%, close to the exact 19%.

Practice example 1: what's the return on a basic paper LBO?

A private equity firm buys a company with $50 million of EBITDA at 8.0x, funded half with debt and half with equity. Ignore fees. Over five years EBITDA grows to $70 million and free cash flow pays down $100 million of debt. It sells at the same 8.0x. What's the return?

Entry: 50 × 8.0 = $400 million, so $200 million of debt and a $200 million equity check.
Exit: 70 × 8.0 = $560 million; debt left is $100 million, so equity is $460 million.
Returns: 460 ÷ 200 = 2.3x, an IRR of about 18% over five years.
Where the $260 million gain came from: $160 million from EBITDA growth at a constant multiple (20 × 8.0) and $100 million from paying down debt.

Practice example 2: how do fees and a lower exit multiple change the return?

They cut it: in this example the sponsor ends at 1.5x, about an 11% IRR. The setup: EBITDA of $100 million, bought at 10.0x, with $20 million of fees paid by the sponsor and 5.0x EBITDA of debt. After four years, EBITDA is $120 million and $200 million of debt has been repaid. The exit multiple falls to 9.0x.

Entry: price $1,000 million; debt 5.0 × 100 = $500 million; equity 1,000 + 20 − 500 = $520 million.
Exit: 120 × 9.0 = $1,080 million; debt left is $300 million, so equity is $780 million.
Returns: 780 ÷ 520 = 1.5x, an IRR of about 11% over four years.
The gain of $260 million: +$200 million from EBITDA growth (20 × 10.0), −$120 million from the lower multiple (1.0x × 120), +$200 million of debt paydown, and −$20 million of fees.

Practice example 3: how do you work backward from a target return?

Start from the equity the sponsor needs at exit and solve for the EBITDA that gets there. The setup: a sponsor wants about a 20% IRR over five years, which is roughly 2.5x. It buys a company with $100 million of EBITDA at 10.0x, using $600 million of debt and $400 million of equity, and expects to repay $200 million of debt. If it exits at 10.0x, what EBITDA does it need?

Equity needed at exit: 2.5 × 400 = $1,000 million.
Enterprise value needed: $1,000 million of equity + $400 million of debt left = $1,400 million.
EBITDA needed: 1,400 ÷ 10.0 = $140 million, 40% above today, or about 7% growth a year.

Practice example 4: how do you do a paper LBO when you're given a cash conversion rate?

Add up the cash each year to get the debt paydown, then run the five steps; here the answer is 2.2x, about a 30% IRR. The setup: a sponsor buys a company with $100 million of EBITDA at 10.0x, with $600 million of debt. EBITDA grows to $110 million, $120 million and $130 million over three years, and 50% of each year's EBITDA becomes free cash flow that repays debt. It sells at 10.0x after year 3.

Entry: 100 × 10.0 = $1,000 million; debt $600 million, so equity is $400 million.
Debt paydown: 50% × (110 + 120 + 130) = 50% × 360 = $180 million, leaving $420 million of debt.
Exit: 130 × 10.0 = $1,300 million; minus $420 million of debt, equity is $880 million.
Returns: 880 ÷ 400 = 2.2x over three years, an IRR of about 30% (2x over three years is about 26%, so a bit more).
The $480 million gain: $300 million from EBITDA growth (30 × 10.0) and $180 million from debt paydown.

Practice example 5: what return does debt paydown alone produce?

A modest one: with flat EBITDA and the same multiple, this deal makes about 1.6x, or roughly 10% a year. The setup: EBITDA of $50 million, bought at 8.0x with 60% debt. EBITDA stays at $50 million for five years, free cash flow of $20 million a year repays debt, and the company sells at 8.0x. Then: what exit multiple would get the sponsor to 2.0x?

Entry: 50 × 8.0 = $400 million; debt 60% × 400 = $240 million; equity $160 million.
Debt paydown: 5 × 20 = $100 million, leaving $140 million.
Exit: 50 × 8.0 = $400 million; minus $140 million, equity is $260 million.
Returns: 260 ÷ 160 ≈ 1.6x, an IRR of about 10% over five years.
To reach 2.0x: equity must be 2 × 160 = $320 million, so exit enterprise value must be 320 + 140 = $460 million, or 460 ÷ 50 = 9.2x EBITDA.

Practice example 6: how does a dividend recap change the IRR?

Cash returned early raises the IRR even when the multiple is the same; here it's 2.0x either way, but the IRR rises from about 19% to about 21%. The setup: a sponsor invests $300 million of equity. In year 2 the company borrows to pay the sponsor a $100 million dividend. In year 4 the sponsor sells its equity for $500 million.

MOIC: total cash back is 100 + 500 = $600 million, so 600 ÷ 300 = 2.0x.
Without the dividend timing: 2.0x over four years is about 19%.
With it: part of the money comes back in year 2, so the IRR is higher, about 21%. In an interview, say "a bit above 19%, because some cash comes back early"; the exact figure needs a calculator.
The catch: the new debt lowers the exit equity, so a recap only helps if the company can carry the extra debt.

How do you work out the cash that pays down debt?

Free cash flow ≈ EBITDA − interest − taxes − CapEx − the increase in working capital. Some prompts give interest rates and taxes instead of the debt paydown. One year, worked: EBITDA $100 million, D&A $10 million, $500 million of debt at 8%, a 25% tax rate, CapEx $10 million, no change in working capital.

Interest = 8% × 500 = $40m. Taxes = 25% × (100 − 10 − 40) = $12.5m. Free cash flow = 100 − 40 − 12.5 − 10 = $37.5m of debt paydown.

What paper LBO prompts do candidates report?

In Superday Room's bank, candidates reported 5 paper LBO prompts, 4 of them tagged with a firm: Jefferies (2), Barclays (1) and Morgan Stanley (1). Most use a 10.0x entry multiple and either 4.0x to 5.0x of leverage or a 60/40 debt-to-equity split. These are candidates' reports, counted October 29, 2026.

What mistakes cost points?

Most come from using the wrong base: the purchase price instead of the equity check, or the original debt instead of the debt left.

Forgetting that fees raise the equity check but not the exit value.
Using the purchase price instead of the equity check in the MOIC.
Subtracting the original debt at exit instead of the debt left after paydown.
Silence while you calculate. Say each step out loud, in round numbers.
Giving a MOIC without the IRR, or the other way round. Give both.

Frequently asked questions

What is a paper LBO?: A leveraged buyout worked out with pen and paper, or in your head, in a few minutes, to find the private equity firm's return from an entry price, the debt used, growth and an exit multiple.
How do you calculate IRR in a paper LBO?: Divide exit equity by entry equity for the multiple of invested capital (MOIC), then convert: over five years, 2.0x is about 15%, 2.5x about 20% and 3.0x about 25%. Exactly, IRR = MOIC^(1/years) − 1.
Where do LBO returns come from?: EBITDA growth, debt paydown and any change in the multiple between entry and exit, less fees.
What IRR is 2x over 3 years?: About 26%. Over four years 2x is about 19% and over five about 15%; 3x is about 44%, 32% and 25% over three, four and five years. Each is MOIC^(1/years) − 1, rounded.
Do banks ask paper LBOs?: Some do. In Superday Room's bank, candidates reported 5 paper LBO prompts, 4 of them tagged with a firm, counted October 29, 2026.

Sources

Superday Room, “Superday Room question bank: questions tagged by the firm and interview round candidates reported”, counted October 29, 2026.