A leveraged buyout model forecasts how a business performs under significant debt and then shows what the equity is worth at exit. A quick or lean LBO model is the smallest version that still answers the investment question: What do we earn, how do we pay the debt, and what moves those outcomes? In a timed interview test, a 60-90 minute sprint rewards judgment, structure, and clean math over bells and whistles.
Your goal is to deliver decision-grade outputs with logic that an interviewer can audit in seconds. That means entry and exit economics, debt repayment, coverage, and two simple sensitivities. With 30-day Term SOFR around 5.34% as of 15-Nov-2024 and average first-lien yields near 10.1% as of Oct-2024, interest is not an afterthought. Median buyout leverage hovered near 5.6x in 2023. Underwrite with that weight in mind and protect coverage headroom.
What your lean LBO must prove
At a minimum, your model should answer the sponsor’s decision questions with crisp outputs. That means equity IRR and MOIC, net debt at exit, total debt repaid, coverage trends, and a quick read on multiple and growth risk.
- Core outputs: Equity IRR, MOIC, net debt at exit, cumulative debt repaid.
- Coverage metrics: EBITDA to cash interest by year with a visible worst year.
- Two sensitivities: Entry multiple vs exit multiple, and growth vs exit multiple.
- Compliance check: If a target IRR or covenant is provided, show pass or fail.
Step 1: Define scope and build the spine fast
Start by writing the output list. Commit to equity IRR, MOIC, net debt at exit, and two two-way sensitivities. If the prompt sets a target IRR or covenant, include a compliance box and do not overbuild. Fix the hold period to the prompt and default to five years if silent.
Decide exit mechanics early. Use a fixed multiple or calibrate to comps. If entry multiple and growth look mismatched, add a second exit case to show judgment. Keep it on one sheet unless instructed otherwise. Six blocks in order keep you fast and auditable: Assumptions; Sources and Uses; Operating Case; Debt and Interest; Cash Waterfall and Returns; Sensitivities and Checks. Freeze panes and label each block to limit navigation mistakes.
Lock rules early. Use one column per year, no volatile functions, and avoid OFFSET and INDIRECT. Skip circularity unless a revolver plug is mandatory. If iteration helps the revolver, enable it with a minimum cash lock and state the assumption clearly.
Step 2: Sources and Uses that tie on the first try
Start with enterprise value from the prompt or entry multiple times LTM EBITDA. Equity value equals EV minus net debt and debt-like items. Include rollover equity as both a source and a use because it lowers new-money equity and affects ownership. If the prompt hints at a minority position, flag the governance effect.
List uses as purchase price, any debt paydown at close, transaction fees, and financing fees. Absent guidance, middle-market sponsor deals often assume 2% of EV for transaction fees and 2% of new funded debt for financing fees. When GAAP precision is requested, treat financing fees as a contra-debt asset and amortize through interest expense.
List sources as each debt tranche, seller notes, rollover, and sponsor equity. If there is preferred equity or PIK debt, show cash-pay and PIK separately. Tie Sources = Uses with a one-line equality check. If minimum sponsor ownership matters, compute pre-money and post-money diluted ownership clearly.
Set terms beside each source: base rate, spread, amortization, and prepayment rules. Place the base rate in Assumptions and add the spread by tranche. A simple context line such as “Base rate 5.3% per Term SOFR on 15-Nov-2024” keeps assumptions grounded.
Common errors to avoid
- Double-counted fees: Do not count financing fees in Uses and also net them from debt proceeds.
- Missing OID: Include original issue discount when the test asks for cash interest on net proceeds.
- Net debt errors: Enforce minimum cash when calculating entry net debt.
Step 3: A compact operating case that taxes correctly
Build the operating case in five to seven lines: revenue, EBITDA, D&A, capex, and net working capital. Drive revenue by growth and EBITDA by margin. Tie depreciation to prior capex with a simple schedule, or use a percent-of-sales proxy if time is tight. Model change in working capital as a percent of sales unless the prompt provides day metrics. When given days, compute DSO, DPO, and DIO and derive the change to earn credibility with a small lift in time.
Keep interest and taxes tight. Compute EBIT and then EBT. Apply a cash tax rate to positive EBT, with zero when negative unless instructed to model interest limitations and NOLs. Avoid building a full deferred tax schedule unless asked. Calculate FCFF as EBITDA minus cash taxes, minus capex, minus change in working capital. If you must show statements, add only a minimal net income line and a simple cash reconciliation. If add-backs or cost saves appear in the prompt, route them through EBITDA timing and keep non-cash add-backs out of cash flow so you do not overstate deleveraging.
Sanity checks for the operating case
- Margin path: Tie EBITDA margin expansion to operating leverage and specific savings.
- Capex realism: Capex below maintenance for long stretches inflates exit cash.
- Working capital: Persistent NWC releases in a growth story are unusual.
Step 4: Debt, interest, and a sweep that holds together
Set opening balances from Sources and Uses and then build the debt schedule. For each period, calculate scheduled amortization, interest, mandatory prepayments, and ending balances. Separate cash-pay from PIK interest. PIK compounds principal while cash-pay reduces cash.
Make the interest method explicit. Beginning-of-period balances avoid circularity. Average balances are fine if iteration is permitted and helpful. For floating tranches, rate equals base rate plus spread. With first-lien yields around 10.1%, monitor EBITDA to cash interest coverage. Put that ratio on its own line and watch it every year to protect covenant headroom.
Use a revolver plug only if the test expects cash neutrality above minimum cash. Define minimum cash as a flat dollar amount. Surplus cash after operations and required uses should flow through a cash sweep to prepay the term loan. If iteration is off, allow negative cash to flag underfunding rather than over-engineering a fragile revolver formula.
Add an excess cash flow sweep with one line. Set a sweep percentage and apply it after mandatory uses. Keep the waterfall order clean in the model lines: scheduled amortization, cash interest, cash taxes, capex, working capital change, mandatory sweeps, and then optional prepay.
Place covenant math here. Compute net leverage and coverage. If the prompt sets thresholds, test them. If not, include a reference band. In today’s rate environment, 1.8-2.0x EBITDA to cash interest in base is a reasonable anchor.
Step 5: Exit, returns, and two sensitivities that matter
Set exit enterprise value as exit multiple times exit-year EBITDA. Subtract net debt at exit to get equity value. Include exit transaction costs only if asked. Do not assume a refinancing unless specified. Most cases assume a year five sale near the entry multiple, unless margins or growth change materially.
Compute equity cash flows as the day-one equity outlay and the proceeds at exit, plus any interim distributions. If asked for a dividend recap, add the mid-hold debt raise and dividend, and then show post-recap coverage and leverage. Respect preferred equity and management rollovers in the distribution waterfall before common equity to keep optics fair.
Keep IRR clean. Use IRR for annual periods or XIRR if you introduce midyear flows. MOIC equals total equity proceeds divided by total equity invested. Place IRR and MOIC top right as your fast decision cue. Then build two short two-way sensitivity tables. The high-value one is entry multiple versus exit multiple. The second is EBITDA growth versus exit multiple. Link to explicit input cells and show IRR and MOIC in the table outputs. If time is tight, build only the entry versus exit table.
If you want a paper-based drill to prepare, run a quick paper LBO that estimates deleveraging and exit equity in five minutes. For a digital practice reference, a simple LBO model template shows the flow without extra layers.
Speed patterns, edge cases, and self-checks
Work left to right: Assumptions, Sources and Uses, Operating Case, Debt and Interest, Returns, Sensitivities. Do not link across blocks until subtotals foot. Put a small check cell in each block. Checks surface errors early and keep you out of circular ratholes. Use consistent signs so that outflows such as interest, taxes, and working capital increases are negative. That reduces hidden sign errors in IRR and coverage.
Edge cases you might see
- Unitranche vs split debt: Treat a single line as unitranche with blended pricing. If separated, keep tranches distinct.
- PIK toggle: Add a flag. When on, accrue to preferred and deduct before common at exit.
- Negative NWC: Use a negative working capital percent of sales with correct sign so growth consumes cash when it should.
- Add-on deals: Size as a percent of entry EV, apply a simple multiple and platform margin, and finance with revolver or incremental term loan.
Checks that save you
- Equality check: Sources and Uses must tie.
- Principal floor: Principal cannot drop below zero. Wrap optional prepayment with MIN.
- Cash discipline: Do not breach minimum cash if a revolver exists. If none exists, let cash go negative to signal a gap.
- Coverage accuracy: Split cash interest used for coverage from total interest used in EBT when PIK exists.
- Tax floor: Clamp cash taxes to zero when EBT is negative if NOLs are not modeled.
- Sensitivity logic: IRR should rise with exit multiple or growth. If not, fix links or signs.
- Deleveraging path: Leverage should step down and coverage widen if margins hold.
A 60-90 minute build plan you can stick to
- 0-3 minutes: Skim prompt, note outputs and debt terms, set base rate, draw six blocks, freeze panes.
- 4-10 minutes: Build Assumptions and Sources and Uses. Enter EV or entry multiple, debt tranches, fees, rollover, and sponsor equity. Tie Sources = Uses.
- 11-20 minutes: Build the Operating Case. Add revenue growth, EBITDA margin, D&A, capex, working capital change, cash taxes, and FCFF.
- 21-35 minutes: Build Debt and Interest. Set openings, amortization, rate by tranche, cash interest subtotal, PIK logic, and endings. Create a simple revolver only if required.
- 36-45 minutes: Build Waterfall and Returns. Add sweep, debt paydown and cash build, exit EV, net debt at exit, equity proceeds, IRR and MOIC, and a small covenant box.
- 46-55 minutes: Build the entry vs exit sensitivity and then growth vs exit if time allows. Add summary checks.
- 56-65 minutes: Audit one period end to end. Review coverage and leverage paths, fix signs, format, and label key outputs.
When time slips, cut smart
Prioritize Sources and Uses, then the Operating Case, then Debt and Interest. Compute returns only after those sections foot. If you can build only one sensitivity, choose entry versus exit multiple. If you need to trim further, drop detailed working capital or a full three-statement model link. For taxes, a flat rate on positive EBT with a zero floor is acceptable in a quick build.
Current market anchors to keep assumptions real
Base rates of 5.0-5.5% and all-in first-lien yields of 9-11% are reasonable unless the prompt says otherwise. Given median leverage near 5.6x, aim for 1.8-2.0x EBITDA to cash interest in base to keep covenant cushion. These anchors help you avoid overleveraging and missing the sweep math.
Minimal pseudo-logic you can copy
- EBITDA: Sales x margin.
- EBIT: EBITDA minus D&A.
- EBT: EBIT minus cash interest minus PIK interest if expensed.
- Cash taxes: MAX(0, EBT x tax rate).
- FCFF: EBITDA minus cash taxes minus capex minus change in working capital.
- Cash before financing: FCFF.
- Debt principal: Prior principal minus amortization minus sweep plus PIK interest if any.
- Exit equity: Exit EV minus net debt at exit.
- MOIC: Exit equity plus interim distributions divided by sponsor equity invested.
- IRR: IRR of equity cash flows using annual periods or XIRR if needed.
Make it explainable in two minutes
Lead with the answer. “At X entry multiple and Y leverage, with Z growth and flat margins, the company delevers to A times net leverage and delivers B percent IRR with no multiple expansion.” Then show cash interest and FCFF lines. Point to the worst year coverage and the sensitivity table for multiple risk to demonstrate disciplined underwriting.
Likely follow-ups and fast responses
- Largest risk: “Two turns off the exit multiple or 300 bps margin compression pushes IRR below threshold. See the top-left of the sensitivity table.”
- Deleveraging drivers: “Sweep from FCFF pays down D. Growth contributes E. Margin expansion adds F.”
- First lever for IRR: “Price first, then financing terms, then margin. A one turn price cut adds roughly G bps to IRR.”
- Dividend recap: “Feasible if coverage stays above 1.8x and net leverage remains within the step-down. After a J turn recap in year 3, coverage is Kx and net leverage Lx.”
Two upgrades that impress without slowing you down
Two small additions can raise your score with almost no extra time. First, add a “Return Bridge” that decomposes IRR into price change, deleveraging, and earnings growth. This one-line attribution shows that you think like an investor. Second, insert a micro “covenant modeling” bar with year-by-year headroom in percentage points, not just pass or fail. That gives the interviewer an instant view of resilience to rate or margin shocks.
What to avoid
- Macros or UDFs: Interviewers cannot audit them in 90 minutes.
- Hidden assumptions: Drive from labeled inputs and keep formulas transparent.
- Hardcoded interest: Link all interest to the tranche schedule so sweeps flow through.
- Overbuilt taxes: Keep tax logic lean unless the prompt demands detail.
Key Takeaway
In a 60-90 minute LBO, clarity beats complexity. Build the spine that answers IRR, MOIC, deleveraging, and coverage with credible assumptions tied to today’s rates. Keep the sensitivity tables front and center, enforce minimum cash, and let checks guide speed. If returns rely on multiple expansion or thin deleveraging, say so and propose a fix. Clean math and candid trade-offs win the room.