A paper LBO is a buyout worked out with pen and paper, often in five to ten minutes of a private equity interview. The interviewer wants clear steps and sensible rounding, not decimals.
- Entry: purchase price = EBITDA x entry multiple. Debt = EBITDA x the debt multiple. Equity = price - debt.
- Exit: grow EBITDA (10% a year for 5 years is about x1.61), times the exit multiple.
- Debt at exit = debt at entry - debt repaid. Exit equity = exit value - debt at exit.
- MOIC = exit equity / entry equity.
- IRR from rules of thumb. Over 5 years: 2.0x is about 15%, 2.5x about 20%, 3.0x about 25%. Over 3 years: 2.0x is about 26%.
Growth factors to memorize: 1.1^5 is about 1.61, 1.05^5 about 1.28, 1.15^5 about 2.0.
Say each number out loud as you go. If you slip, the interviewer can follow your steps and see that the method is right. The shortcuts are rough at best, a point or two off, and interviewers don't expect an exact IRR by hand.