{
  "id": 51605,
  "date": "2022-01-31T11:04:17",
  "date_gmt": "2022-01-31T16:04:17",
  "guid": { "rendered": "https:\/\/finance-able.com\/?p=51605" },
  "modified": "2025-12-21T16:54:02",
  "modified_gmt": "2025-12-21T21:54:02",
  "slug": "paper-lbo",
  "status": "publish",
  "type": "post",
  "link": "https:\/\/finance-able.com\/paper-lbo\/",
  "title": { "rendered": "The Paper LBO in 5 Steps \u2013 The Ultimate Guide" },
  "content": {
    "rendered": "\n<p style=\"font-size:18.5px\">The <strong>Paper LBO, <\/strong>a full LBO analysis completed with pen and paper, is an <strong>increasingly common question<\/strong> in<span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong> <\/strong><\/span><a href=\"https:\/\/finance-able.com\/investment-banking-career-path\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investment Banking<\/span><\/strong><\/a> and <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a> interviews. Understandably, the thought of doing <strong>mental math on the spot and walking through an entire LBO<\/strong> analysis is <strong>intimidating<\/strong>. But Paper LBOs do not need to be such a scary prospect.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this guide, we will walk you through <strong>the common variations of Paper LBOs<\/strong> (<strong>+ Mental Math tricks<\/strong>) to help you <strong>nail this question and get the job<\/strong>!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this article, you will learn:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The <strong>Basics of Paper LBO<\/strong> Interview Questions (typical prompt, most common variations, timing, interviewer goals).<\/li>\n\n\n\n<li>The <strong>most Common Pitfalls<\/strong> when working through a Paper LBO.<\/li>\n\n\n\n<li>The <strong>Critical Mental Math Hacks <\/strong>needed to fly through these Interview Questions.<\/li>\n\n\n\n<li>The <strong>5 Step Process<\/strong> to nail the <strong>core Paper LBO<\/strong> (solving for IRR).<\/li>\n\n\n\n<li>A separate <strong>5 Step Process<\/strong> to master the <strong>Reverse Paper LBO<\/strong> (solving for required EBITDA Growth based on Target Return).<\/li>\n<\/ul>\n\n\n\n<p class=\"yoast-reading-time__wrapper\"><span class=\"yoast-reading-time__icon\"><svg aria-hidden=\"true\" focusable=\"false\" data-icon=\"clock\" width=\"20\" height=\"20\" fill=\"none\" stroke=\"currentColor\" style=\"display:inline-block;vertical-align:-0.1em\" role=\"img\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 24 24\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" stroke-width=\"2\" d=\"M12 8v4l3 3m6-3a9 9 0 11-18 0 9 9 0 0118 0z\"><\/path><\/svg><\/span><span class=\"yoast-reading-time__spacer\" style=\"display:inline-block;width:1em\"><\/span><span class=\"yoast-reading-time__descriptive-text\">Estimated reading time: <\/span><span class=\"yoast-reading-time__reading-time\">78<\/span><span class=\"yoast-reading-time__time-unit\"> minutes<\/span><\/p>\n\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-tl-dr\" style=\"font-size:35px\"><strong>TL;DR<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A <strong>Paper LBO<\/strong> requires an <strong>Interview Candidate<\/strong> to walk through a <strong>full LBO analysis <\/strong>with just <strong>Pen and Paper<\/strong> (no calculator allowed).<\/li>\n\n\n\n<li>The <strong>Paper LBO<\/strong> can be a <strong>daunting Interview Question<\/strong> but can be <strong>mastered with a 5 Step Process<\/strong>.<\/li>\n\n\n\n<li><strong>Mental Math shortcuts<\/strong> <strong>are essential<\/strong> to mastering Paper LBO questions.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"a-little-context-on-the-paper-lbo\" style=\"font-size:35px\"><strong>A Little Context on the \u2018Paper LBO\u2019<\/strong><\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-7e017af9\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions.png\" alt=\"A stick confused about Paper LBOs and how to master core mental math tricks\" class=\"wp-image-51740\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-confused-about-common-paper-LBO-questions-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Just the <strong>mention of a Paper LBO<\/strong> question can <strong>strike fear in the hearts<\/strong> of aspiring <a href=\"https:\/\/finance-able.com\/what-is-an-investment-bank\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investment Banking<\/span><\/strong><\/a> and <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a> candidates.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And it is <strong>no surprise<\/strong> that\u2019s the case!<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>LBO Mechanics + Mental Math + Lots of Moving Pieces + Numerous Variations = Lots of Stress<\/em><\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">We <strong>cannot eliminate all of the stress<\/strong> involved in a <strong>Paper LBO<\/strong>, but we can help you <strong><em><u>massively<\/u><\/em> reduce it<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Before we jump ahead, it is <strong>worth mentioning<\/strong> that <strong>Paper LBOs<\/strong> are <strong>not just an <\/strong><a href=\"https:\/\/finance-able.com\/daily-finance-interview-questions\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Interview Question<\/span><\/strong><\/a><span class=\"has-inline-color has-vivid-cyan-blue-color\">.<\/span><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Private Equity and <\/strong><a href=\"https:\/\/finance-able.com\/investment-banking-career-path\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investment Banking professionals<\/span><\/strong><\/a><strong> use these \u2018<em>back of the envelope<\/em>\u2019<\/strong> calculations every day <strong>on the job<\/strong> <strong>to<\/strong> <strong>quickly assess the attractiveness of an LBO transaction<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Now let\u2019s dive into what a Paper LBO typically looks like in real life.<\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n<div class=\"kb-row-layout-wrap kb-row-layout-id51605_e4f979-70 alignnone wp-block-kadence-rowlayout\"><div class=\"kt-row-column-wrap kt-has-1-columns kt-row-layout-equal kt-tab-layout-inherit kt-mobile-layout-row kt-row-valign-top\">\n\n<div class=\"wp-block-kadence-column kadence-column51605_61b4a3-cf inner-column-1\"><div class=\"kt-inside-inner-col\">\n<h2 class=\"wp-block-heading\" id=\"h-want-to-learn-more-about-finance\" style=\"font-size:35px\"><strong>Want To Learn More About Finance?<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18px\"><strong>Check out all of our (free) deep-dive articles in our<\/strong> <a href=\"https:\/\/finance-able.com\/analyst-starter-kit\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Analyst Starter Kit<\/span><\/strong><\/a>:<\/p>\n\n\n<div class=\" wp-block-kadence-portfoliogrid kb-blocks-portfolio-loop-block alignnone kb-portfolio-loop51605_075e46-58 kb-portfolio-grid-layout-carousel kt-blocks-carousel \"><div class=\" kb-portfolio-grid-layout-carousel-wrap kt-post-grid-layout-carousel-wrap kt-carousel-arrowstyle-whiteondark kt-carousel-dotstyle-dark splide kb-blocks-portfolio-img-hover-zoomout kb-blocks-portfolio-content-hover-zoomin\" data-columns-xxl=\"3\" data-columns-xl=\"3\" data-columns-md=\"3\" data-columns-sm=\"2\" data-columns-xs=\"1\" data-columns-ss=\"1\" data-slider-center-mode=\"false\" data-slider-type=\"carousel\" data-slider-anim-speed=\"400\" data-slider-scroll=\"1\" data-slider-dots=\"true\" data-slider-arrows=\"true\" data-slider-hover-pause=\"false\" data-slider-auto=\"true\" data-slider-center-mode=\"false\" data-slider-speed=\"7000\" data-show-pause-button=\"false\" data-slider-gap=\"30\" data-slider-gap-tablet=\"30\" data-slider-gap-mobile=\"30\" data-slider-gap-unit=\"px\" data-item-selector=\".kb-portfolio-masonry-item\"><div class=\"kadence-splide-slider-init splide__track\"><ul><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"An image of a lightbulb with the text Unlevered Beta Formula\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/unlevered-beta-formula\/\" aria-label=\"Unlevered Beta Formula &#8211; Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Unlevered Beta Formula &#8211; Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"A lightbulb and the words Purchase Price Allocation\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/purchase-price-allocation\/\" aria-label=\"Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:45.138888888889%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"720\" height=\"325\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png\" class=\"attachment-large size-large wp-post-image\" alt=\": A stick figure answering an interview question with the title text &#039;Walk Me Through an LBO&#039; below\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png 720w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-300x135.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-400x181.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-624x282.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-50x23.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-100x45.png 100w\" sizes=\"auto, (max-width: 720px) 100vw, 720px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" aria-label=\"Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><\/ul><\/div><div class=\"clearfix\" style=\"clear:both\"><\/div><\/div><\/div><\/div><\/div>\n\n<\/div><\/div>\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-is-a-paper-lbo\" style=\"font-size:35px\"><strong>What is a Paper LBO?<\/strong><\/h2>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo-1024x576.png\" alt=\"a stick figure confused when researching the Paper LBO\" class=\"wp-image-51889\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/what-is-a-paper-lbo.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">A Paper LBO is an <strong>Interview Question<\/strong> in which the <strong>Interviewer asks <\/strong>you to complete an <strong>entire LBO analysis with just pencil (or pen) and paper<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In most cases, you are <strong>not allowed to use a calculator<\/strong>. Instead, you must do all of the <strong>math in your head<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Most Paper LBOs<\/strong> must be completed in <strong>10-15 minutes<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And Interviewees <strong>must write out and show all of their calculations<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-2aaea763\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-Paper-LBO-concerns-and-solutions.gif\" alt=\"the most common interviewee concerns with a Paper LBO and how to solve them\" class=\"wp-image-51760\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">For most candidates, the <strong>two scariest aspects<\/strong> of the process are:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li>On-the-spot Mental Math<\/li>\n\n\n\n<li>Mixing up LBO model mechanics<\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\">But there are <strong>a few Mental Math tricks <\/strong>that you can use to <strong>mitigate most of the stress with Item #1 above<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For <strong>Item #2<\/strong>, we will provide a <strong>simple, 5 Step framework<\/strong> <strong>to keep you anchored<\/strong> when working through these problems.<\/p>\n\n\n<!-- This site is converting visitors into subscribers and customers with OptinMonster - https:\/\/optinmonster.com :: Campaign Title: Paper LBO Obfuscation -->\n<div id=\"om-y4joitfucyyezqrakzh7-holder\"><\/div>\n<script>(function(d,u,ac){var s=d.createElement('script');s.type='text\/javascript';s.src='https:\/\/a.omappapi.com\/app\/js\/api.min.js';s.async=true;s.dataset.user=u;s.dataset.campaign=ac;d.getElementsByTagName('head')[0].appendChild(s);})(document,130718,'y4joitfucyyezqrakzh7');<\/script>\n<!-- \/ OptinMonster -->\n\n\n\n<p style=\"font-size:18.5px\">We have now <strong>covered the basics of Paper LBOs<\/strong>. Let\u2019s quickly <strong>clarify the difference between the Paper LBO<\/strong> <strong>and another common LBO-related Interview Question<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-vs-walk-me-through-an-lbo\" style=\"font-size:35px\"><strong>Paper LBO vs. Walk Me Through an LBO<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\">Before we dive in here, we must <strong>clarify a common point of confusion<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A <strong>common question<\/strong> around <strong>Paper LBOs<\/strong> is how they <strong>differ<\/strong> <strong>from<\/strong> the \u2018<strong>Walk Me Through an LBO<\/strong>\u2019 <strong>Interview Question<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>big difference<\/strong> between these two questions is that you are <strong>typically not working through LBO calculations on the spot<\/strong> with \u2018<strong>Walk Me through an LBO<\/strong>.\u2019<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-dc64c3c8\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/walk-me-through-an-lbo-vs-paper-lbo.gif\" alt=\"A comparison of the two most common LBO interview questions\" class=\"wp-image-51759\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">With \u2018<strong>Walk Me Through an LBO,\u2019<\/strong> an interviewee <strong>typically only <\/strong>provides a <strong>high-level overview<\/strong> of the <strong>LBO process<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>If you are new to LBOs<\/strong> and preparing for interviews, we <strong>recommend checking out<\/strong> our \u2018<a href=\"https:\/\/finance-able.com\/walk-me-through-an-lbo\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Walk Me Through an LBO<\/span><\/strong><\/a>\u2019 deep-dive article.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With that point clarified, <strong>let\u2019s look at what interviewers when job candidates work through a Paper LBO.<\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-are-interviewers-looking-for\" style=\"font-size:35px\"><strong>What are Interviewers Looking For?<\/strong><\/h2>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">When an <strong>Interviewer asks you to complete a Paper LBO<\/strong>, they are <strong>testing you on a few factors<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-6d4f4acb\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria.png\" alt=\"a list of the common factors interviewers look for during the Interview\" class=\"wp-image-51722\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interviewer-paper-lbo-criteria-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">The items below are the core items interviewers are testing:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li><strong>Knowledge of LBOs (and Key Drivers<\/strong>): Do you have a strong understanding of an LBO model\u2019s mechanics, key steps, and underlying drivers?<\/li>\n\n\n\n<li><strong>Composure Under Pressure<\/strong>: Can you keep your cool while working through a tricky problem with someone looking over your shoulder?<\/li>\n\n\n\n<li><strong>Mental Math<\/strong>: Can you quickly work through various mental math calculations without getting tripped up?<\/li>\n\n\n\n<li><strong>Organization<\/strong>: Can you keep all of the bits and pieces organized when working through this problem?<\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\">You will be in <strong>great shape<\/strong> if you <strong>exhibit all four factors above<\/strong> and <strong>complete the exercise with accuracy<\/strong>!<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>If you fumble on any of the four<\/strong>, you will have difficulty<strong> landing the job, particularly in Private Equity<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With those points covered, let\u2019s look at <strong>common pitfalls<\/strong> when answering <strong>Paper LBO questions<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"5-common-paper-lbo-mistakes-and-solutions\" style=\"font-size:35px\"><strong>5 Common Paper LBO Mistakes (and Solutions)<\/strong><\/h2>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">There are <strong>five common mistakes<\/strong> to avoid <strong>when working through a Paper LBO<\/strong> problem in an interview.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large advgb-dyn-ff3d6b1b\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1-1024x576.png\" alt=\"A list of the five most common mistakes made by interviewees on the Paper LBO exercise.\" class=\"wp-image-51903\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/5-common-paper-lbo-mistakes-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mistake-1-losing-sight-of-the-big-picture\" style=\"font-size:26px\"><strong>Mistake #1 &#8211; Losing Sight of the Big Picture<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">There are many moving pieces in an LBO model, and it is easy to get lost.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><u>Solution<\/u><\/em><\/strong><em>: To avoid getting lost, you <strong>need a \u2018North Star.<\/strong>\u2019 Your <strong>North Star<\/strong> is the <strong><a href=\"#paper-lbo-5-steps\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">5 Step Process<\/span><\/a><\/strong> laid out below for a Paper LBO. Whenever you get lost, <strong>always anchor back to the framework<\/strong>.<\/em><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mistake-2-mixing-up-numbers-in-your-analysis\" style=\"font-size:26px\"><strong>Mistake #2 &#8211; Mixing Up Numbers in Your Analysis<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">Even with a solid grasp of the big picture, you will need to manage numerous details during a Paper LBO.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><u>Solution<\/u><\/em><\/strong><em>: The key here is to <strong>keep your work as neat as possible<\/strong>. If you try to write everything out too quickly and have sloppy handwriting, you are bound to mix up your numbers.<\/em><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mistake-3-complicating-calculations\" style=\"font-size:26px\"><strong>Mistake #3 \u2013 Complicating Calculations<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">In a Paper LBO exercise, <strong>interviewees often feel they need to be incredibly precise<\/strong> with their calculations.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><span class=\"has-inline-color has-luminous-vivid-orange-color\">Unnecessary complexity or precision in a Paper LBO exercise is your archenemy.<\/span><\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">This <strong>desire for precision<\/strong> leads to <strong>extra information you have to manage<\/strong>, which <strong>in turn leads to getting stuck<\/strong> in your calculations.&nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Clearly, <strong>calculation errors are never OK<\/strong> in a Paper LBO. However, you <strong>do not need<\/strong> to calculate every number to the <strong>third decimal place<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><u>Solution (Part 1)<\/u><\/em><\/strong><em>: The first thing to note is that you should <strong><u>round numbers wherever possible<\/u><\/strong>.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>For example, let\u2019s say we need to calculate 10% Revenue growth on $121 of Revenue.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>The exact answer is: $121 * 1.1 = $133.1.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>But in a case like this, it\u2019s entirely acceptable to round to $133.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><u>Solution (Part 2)<\/u><\/em><\/strong><em>: With any set of calculations in the Paper LBO process, you should always <strong><u>look for ways to reduce the number of calculations<\/u><\/strong> (and thus your mental load).<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>All else equal, the <strong>more calculations<\/strong> you make, the <strong>more likely you are to make a mistake<\/strong>.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>For example, when a <strong>prompt assumes constant Revenue Growth<\/strong>, you can <strong>shortcut the number of calculations<\/strong> by simply <strong>growing any item that will remain at a constant Percentage of Sales by Revenue Growth<\/strong>.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>We show an <strong>example of this trick later in the article<\/strong>.<\/em><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mistake-4-stumbling-on-mental-math\" style=\"font-size:26px\"><strong>Mistake #4 &#8211; Stumbling on Mental Math<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">The thought of <strong>performing numerous quick calculations in your head<\/strong> during an Interview is <strong>understandably intimidating<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><u>Solution<\/u><\/strong>:&nbsp; <em>Mental Math, when performed well, can look like magic to an outside observer.<\/em> <em>But no, most <strong>people in Finance are <u>not<\/u> human calculators<\/strong>.<\/em><\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-710732d8\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks.png\" alt=\"A list of the core mental math tricks needed to master the Paper LBO exercise.\" class=\"wp-image-51758\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/common-mental-math-tricks-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><em>Rather <strong>most Finance professionals learn a set of Mental Math shortcuts <\/strong>(listed above) to make mental calculations quickly.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>This article will help you to shortcut that process and<strong> learn those tricks now<\/strong>.<\/em><\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mistake-5-not-enough-practice\" style=\"font-size:26px\"><strong>Mistake #5 \u2013 Not Enough Practice<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">It is <strong>not enough to complete one or two Paper LBO practice problems<\/strong> before an interview.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><u>Solution<\/u><\/em><\/strong><em>: You should <strong>practice working through Paper LBOs as many times as possible<\/strong> (ideally ten times or more).<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>As you work through additional problems, you will <strong>begin to see the common threads as well as the shortcuts<\/strong> that permeate most Paper LBO questions.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>Learning these things can <strong>help you go on autopilot<\/strong> for stretches of the exercise to <strong>give your brain a break<\/strong> (or allow for background processing of an upcoming problem).<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>In short, Practice!<\/em><\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now that we have <strong>covered the common pitfalls<\/strong> let\u2019s <strong>carry on to the most common Paper LBO Variations<\/strong>.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-92360efc\"><\/div>\n\n\n<div class=\"kb-row-layout-wrap kb-row-layout-id51605_50884d-75 alignnone wp-block-kadence-rowlayout\"><div class=\"kt-row-column-wrap kt-has-2-columns kt-row-layout-equal kt-tab-layout-inherit kt-mobile-layout-row kt-row-valign-top\">\n\n<div class=\"wp-block-kadence-column kadence-column51605_204f40-92 inner-column-1\"><div class=\"kt-inside-inner-col\">\n<p class=\"has-text-align-center\" style=\"font-size:28px\"><strong><span style=\"color:#061e33\" class=\"has-inline-color\">Enjoying the Article?<br><br>Check out our LBO Modeling Course<\/span><\/strong>.<\/p>\n<\/div><\/div>\n\n\n\n<div class=\"wp-block-kadence-column kadence-column51605_18b419-f4 inner-column-2\"><div class=\"kt-inside-inner-col\">\n<div class=\"wp-block-kadence-advancedbtn kb-buttons-wrap kb-btns51605_44e536-3b\"><a class=\"kb-button kt-button button kb-btn51605_856f78-2b kt-btn-size-standard kt-btn-width-type-auto kb-btn-global-outline  kt-btn-has-text-true kt-btn-has-svg-false  wp-block-kadence-singlebtn\" href=\"https:\/\/courses.finance-able.com\/\"><span class=\"kt-btn-inner-text\">Let&#8217;s Go!<\/span><\/a><\/div>\n<\/div><\/div>\n\n<\/div><\/div>\n\n\n<div style=\"height:120px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-bf639d38\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"common-variations-of-the-paper-lbo\" style=\"font-size:35px\"><strong>Common Variations of the Paper LBO<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\">Before we dive into our first Paper LBO example, we must <strong>clarify a few common variations of Paper LBO problems<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-192ea7ee\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations.png\" alt=\"A comparison of the two most common Paper LBO problems.\" class=\"wp-image-51757\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-lbo-variations-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Below are the <strong>most common Paper LBO variations<\/strong> you are likely to encounter:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li><strong>The Core Paper LBO:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Includes all necessary assumptions<\/li>\n\n\n\n<li>Assumptions are constant over the projection period<\/li>\n\n\n\n<li>Purchase Price based on LTM <a href=\"https:\/\/finance-able.com\/ebitda\/\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">EBITDA<\/mark><\/strong><\/a><\/li>\n\n\n\n<li>Only one layer (\u2018tranche\u2019) of Debt<\/li>\n\n\n\n<li><strong>Solve for IRR<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The Reverse Paper LBO:<\/strong>\n<ul class=\"wp-block-list\">\n<li>Reverse engineer the Core Paper LBO to determine the level of EBITDA growth required to achieve a <strong>Targeted IRR<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\">You may encounter more <strong>advanced variations (NTM Multiples, Multiple Debt Tranches, Debt Amortization, Assumptions that Vary over the Projection Period, etc.)<\/strong> to the Paper LBO, which we will cover in <strong>future iterations of this article<\/strong>. (see more <strong><a href=\"#advanced-paper-lbo-variations\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">here<\/span><\/a><\/strong>)<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To begin here, we will <strong>focus on the Core Paper LBO<\/strong>, which is the version you are <strong>most likely to see in an Interview<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let\u2019s dive in!<\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-5-steps\" style=\"font-size:35px\"><strong>The Paper LBO in 5 Steps<\/strong><\/h2>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">To <strong>work through a Paper LBO<\/strong>, we\u2019ll use the following <strong>5 Step Process<\/strong>:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-5ac7dc16\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps.png\" alt=\"The key items needed to calculate Levered Free Cash Flow in a Paper LBO\" class=\"wp-image-51731\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/paper-LBO-5-Steps-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<div class=\"schema-how-to wp-block-yoast-how-to-block\"><p class=\"schema-how-to-description\"><\/p> <ol class=\"schema-how-to-steps\"><li class=\"schema-how-to-step\" id=\"how-to-step-1643143985292\"><strong class=\"schema-how-to-step-name\"><strong>Organize Assumptions<\/strong><\/strong> <p class=\"schema-how-to-step-text\">Organize given assumptions by category. The key here is to have a system to track which pieces of data you have and what is missing (if anything).<\/p> <\/li><li class=\"schema-how-to-step\" id=\"how-to-step-1643144025272\"><strong class=\"schema-how-to-step-name\"><strong>Create Sources &amp; Uses Table<\/strong><\/strong> <p class=\"schema-how-to-step-text\">Create a table to work from Purchase Price (<a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Enterprise Value<\/span><\/strong><\/a>) to Debt Funding, and ultimately to the \u2018<a href=\"https:\/\/www.financialpoise.com\/private-equity-fund-v-pe-sponsor\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Sponsor Equity<\/span><\/strong><\/a>\u2019 Investment (i.e., the money the Private Equity Firm will need to contribute).<\/p> <\/li><li class=\"schema-how-to-step\" id=\"how-to-step-1643144047116\"><strong class=\"schema-how-to-step-name\"><strong>Calculate Cumulative Cash Flow<\/strong><\/strong> <p class=\"schema-how-to-step-text\">Work from <strong><a href=\"https:\/\/www.investopedia.com\/terms\/e\/ebitda.asp#:~:text=EBITDA%2C%20or%20earnings%20before%20interest,net%20income%20in%20some%20circumstances.\" target=\"_blank\" rel=\"noreferrer noopener\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><\/mark><\/a><a href=\"https:\/\/finance-able.com\/ebitda\/\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">EBITDA<\/mark><\/strong><\/a><\/strong> to the <a href=\"https:\/\/analystanswers.com\/levered-vs-unlevered-free-cash-flow-whats-the-difference\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Levered Free Cash Flow<\/mark><\/strong><\/a> for each year to determine the cumulative Cash Flow that will be used to pay down Debt.<\/p> <\/li><li class=\"schema-how-to-step\" id=\"how-to-step-1643144077446\"><strong class=\"schema-how-to-step-name\"><strong>Create Exit Analysis<\/strong><\/strong> <p class=\"schema-how-to-step-text\">Calculate Exit Sale Value and work to Exit <a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Equity<\/span><\/strong><\/a> Proceeds.<\/p> <\/li><li class=\"schema-how-to-step\" id=\"how-to-step-1643144094687\"><strong class=\"schema-how-to-step-name\"><strong>Assess Returns<\/strong><\/strong> <p class=\"schema-how-to-step-text\">Calculate the <strong><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.millionacres.com\/real-estate-basics\/real-estate-terms\/what-is-multiple-on-invested-capital-in-real-estate-investing\/#:~:text=Multiple%20on%20invested%20capital%2C%20or%20MOIC%2C%20is%20an%20investment%20return,on%20invested%20capital%20is%201.5.\" target=\"_blank\" rel=\"noreferrer noopener\">Multiple of Invested Capital<\/a><\/span><\/strong> (MOIC) and approximate <a href=\"https:\/\/www.datarails.com\/finance-glossary\/internal-rate-of-return\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Internal Rate of Return<\/span><\/strong><\/a> (IRR) from the Deal.<\/p> <\/li><\/ol><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Below, we will <strong>work through the 5 Steps above<\/strong> using <strong>sample a prompt based on examples of real-life Paper LBOs<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"core-paper-lbo-process-example\" style=\"font-size:35px\"><strong>Core Paper LBO (Process + Example)<\/strong><\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-1f570ed9\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo.png\" alt=\"a stick figure in an interview being asked to complete a Paper LBO.\" class=\"wp-image-51741\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-in-interview-paper-lbo-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">To help make this <strong>a little more tangible<\/strong>, we will <strong>walk through this question as if you were in the Interview<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We will <strong>imagine that you have landed an interview<\/strong> for your dream Private Equity role.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>As we progress through the article<\/strong>, the Interviewer will <strong>add additional twists and turns<\/strong> to throw you off track.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <strong>the first question the Interviewer asks after the initial \u2018<\/strong><a href=\"https:\/\/www.thebalancemoney.com\/tell-me-about-yourself-job-interview-question-2060956\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><em><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Tell Me About Yourself<\/mark><\/em><\/strong><\/a><strong>\u2019 question<\/strong> is the following Paper LBO question.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"the-paper-lbo-prompt\" style=\"font-size:26px\"><strong>The Paper LBO Prompt<\/strong><\/h3>\n\n\n\n<p><br>To kick things off, the <strong>Interviewer shares the details below<\/strong>:<\/p>\n\n\n\n<p><\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-fa66e6ae\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt.png\" alt=\"A sample of the information provided in a typical Paper LBO prompt\" class=\"wp-image-51743\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/typical-paper-LBO-prompt-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">The Interviewer says you can assume that the <strong>Purchase Multiples will be based on <a href=\"https:\/\/finance-able.com\/ltm-revenue\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">LTM EBITDA<\/span><\/a><\/strong>. And that you should <strong>assume no Debt is paid down until Exit<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let&#8217;s jump ahead and see how we can tackle this. <\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-step-1-organize-assumptions\" style=\"font-size:35px\"><strong>Paper LBO Step #1: Organize Assumptions<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong>First of all. Holy moly! That\u2019s a lot of information!<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let&#8217;s start by getting organized.<\/strong> <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below are <strong>the critical items<\/strong> we will need for the <strong>Core Paper LBO<\/strong> the relevant categories to help you stay organized.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-0a361efa\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Paper-LBO-Checklist.gif\" alt=\"A list of the critical items needed to complete the Paper LBO exercise.\" class=\"wp-image-51756\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Let&#8217;s <strong>organize the provided data into the relevant categories<\/strong> <strong>above<\/strong> to ensure we have everything we need.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To <strong>help you keep track of the major categories<\/strong>, you can use the <strong>PD-REIT-CDN mnemonic<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Purchase Price &amp; Debt Funding Details (\u2018PD\u2019 or \u2018Police Department\u2019)<\/li>\n\n\n\n<li>Revenue, EBITDA, Interest, Taxes (\u2018REIT\u2019 or \u2018Real Estate Investment Trust\u2019)<\/li>\n\n\n\n<li>CapEx, D&amp;A, and Net Working Capital (\u2018CDN\u2019 or \u2018Canadian Currency\u2019)<\/li>\n<\/ul>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-d6930d88\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/organized-paper-LBO-assumptions.gif\" alt=\"An animation showing the organization of the assumptions of a Paper LBO prompt.\" class=\"wp-image-51755\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>You\u2019re laughing!<\/strong> <strong>We get it<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">It is a <strong>funny shorthand<\/strong>, but it will <strong>ease the mental burden<\/strong> of completing your Paper LBO and make sure you don\u2019t miss anything!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s <strong>fill in the missing pieces<\/strong> based on the information provided.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"purchase-price-and-debt-funding\" style=\"font-size:23px\"><strong>Purchase Price and Debt Funding<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">With the information provided, we can now <strong>determine the Purchase Price and Debt Funding<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As we noted in our <a href=\"https:\/\/finance-able.com\/walk-me-through-an-lbo\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Walk Me Through an LBO<\/span><\/strong><\/a> article, we calculate purchase in the <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a> world with <strong><a href=\"https:\/\/www.youtube.com\/watch?v=aDEAlQKViUo\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">EBITDA<\/span><\/a><\/strong>&nbsp;* <a href=\"https:\/\/www.google.com\/search?q=EV%2FEBITDA+multiple.\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">EV\/EBITDA Multiple<\/span><\/strong><\/a><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.google.com\/search?q=EV%2FEBITDA+multiple.\" target=\"_blank\" rel=\"noreferrer noopener\">.<\/a><\/span><\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-042523b8\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-purchase-price-in-LBO-LTM-EBITDA.gif\" alt=\"An animation showing purchase price in an LBO is typically calculated based on LTM EBITDA.\" class=\"wp-image-51754\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Interviewer provided the Purchase Multiple of 8.0x<\/strong>, but we <strong>still need EBITDA<\/strong> to calculate <strong>Purchase Price<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>To arrive at EBITDA<\/strong>, we\u2019ll multiply the provided <strong>Revenue of $100 * EBITDA Margin of 15%<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We <strong>have $15 of EBITDA<\/strong>, so our <strong>Purchase Price will be $120<\/strong> ($15 EBITDA * 8.0x EV\/ LTM EBITDA).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now, we can move on to <strong>Debt Funding<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Debt is typically expressed as a <strong>multiple of LTM EBITDA<\/strong> in the LBO world. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-393f8bcb\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-debt-in-LBO-LTM-EBITDA.gif\" alt=\"An animation showing Debt in an LBO is typically calculated based on LTM EBITDA.\" class=\"wp-image-51753\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">We were told that the <strong>Funding would be 4.0x Debt \/ EBITDA<\/strong> in the prompt.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We <strong>have $15 of EBITDA<\/strong>, so our <strong>Debt Funding will be $60<\/strong> ($15 EBITDA * 4.0x Debt \/ LTM EBITDA).<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-a825b0d0\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/organized-paper-LBO-assumptions-EBITDA-DEBT.gif\" alt=\"An animation showing the organization of the assumptions of a Paper LBO prompt.\" class=\"wp-image-51752\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now that we <strong>have organized our Assumptions<\/strong>, we will create our <strong>Sources and Uses table<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-step-2-create-sources-uses-table\" style=\"font-size:35px\"><strong>Paper LBO Step #2: Create Sources &amp; Uses Table<\/strong><\/h2>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Sources and Uses<\/strong> table for a Paper LBO typically <strong>contains very basic<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Purchase Price of the Target<\/li>\n\n\n\n<li>Debt and Equity Funding<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large advgb-dyn-ac16fe61\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1-1024x576.png\" alt=\"An image showing the typical sources and uses of funds in an LBO transaction.\" class=\"wp-image-51945\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/sources-and-uses-of-funds-LBO-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">When working through this step, <strong>always start by figuring out Uses first (in this or any LBO exercise)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In other words, first, <strong>figure out how much money you need to come up with<\/strong> to buy the Business. <strong>Then figure out how you will pay for it.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Our <strong>only \u2018Use of Funds\u2019 in the Core Paper LBO problem<\/strong> is the <strong>Purchase Price<\/strong> of the Business.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In the prior step, we said that the <strong>Purchase Price of the Business (Enterprise Value) is $120<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So we will <strong>need to come up with $120 <\/strong>using a <strong>combination of Debt and Equity funding<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Leveraged Buyouts are first <strong>funded with Debt. <\/strong>The <strong>Private Equity firm covers the rest<\/strong> of the <strong>Purchase Price<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In the <strong>prior step<\/strong>, we determined that we <strong>needed $120 of total Funding<\/strong> to Purchase the Business and we said that <strong>Lenders would offer us $60 of Debt<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-7479ba80\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Sources-and-Uses-Process.gif\" alt=\"An animation showing the real-life process that leads to the Sources and Uses table.\" class=\"wp-image-51751\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>The difference<\/strong> is what the <strong>Private Equity Fund will need to contribute<\/strong> (also called \u2018<strong><em>Sponsor Equity<\/em><\/strong>\u2019).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So as the <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a><strong> Investor<\/strong>, we <strong>must come up with $60 of Funding<\/strong> ($120 Purchase Price &#8211; $60 of Debt Funding).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Note that the <strong>Private Equity funding amount<\/strong> <strong>is often called the \u2018Plug,\u2019<\/strong> because it <strong>funds the gap<\/strong> <strong>between the Purchase Price and any Debt<\/strong> in an LBO transaction.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With the <strong>Sources and Uses completed<\/strong>, we will now <strong>calculate the Cash Flow Generated<\/strong> by the Business over the five-year projection period.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-step-3-calculate-cumulative-cash-flow\" style=\"font-size:35px\"><strong>Paper LBO Step #3: Calculate Cumulative Cash Flow<\/strong><\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-c20a6ab8\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/unlevered-vs-levered-cash-flow.gif\" alt=\"An image contrasting unlevered versus levered free cash flow use cases .\" class=\"wp-image-51750\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">First, we need to clarify what Cash Flow we are calculating here.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Broadly speaking, there are <strong>two types of Cash Flow<\/strong>: Levered and Unlevered.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In a standard <a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Discounted Cash Flow<\/span><\/strong><\/a> analysis, we typically calculate to <strong><em><u>Unlevered<\/u><\/em><\/strong> <strong>Free Cash Flow<\/strong> because we want to value <strong>the Business as a whole (i.e. \u2018<\/strong><a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Enterprise Value<\/span><\/strong><\/a><strong>\u2019)<\/strong>, absent the <strong>impact of Debt<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In an <strong>LBO analysis<\/strong>, however, we are <strong>looking at<\/strong> everything from the <strong>value attributable to the Equity Investor<\/strong> (a Private Equity firm in this case).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Equity Value<\/span> <\/strong><\/a>sits <strong>below Debt <\/strong>in the capital hierarchy.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a result, we look at <strong><em><u>Levered<\/u><\/em><\/strong> <strong>Free Cash Flow<\/strong>, which <strong>incorporates the impact of Debt<\/strong>.&nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To calculate to <strong>Levered Free Cash Flow<\/strong>, we will typically follow the path laid out below:<\/p>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large advgb-dyn-24aee8c2\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1-1024x576.png\" alt=\"The key items needed to calculate Levered Free Cash Flow in a Paper LBO\" class=\"wp-image-51957\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Now that we have laid out the <strong>path to Levered Free Cash Flow<\/strong>, we will <strong>work through each<\/strong> <strong>item one-by-one<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Before we begin, we need to <strong>review a few Mental Math Shortcuts<\/strong> that will help us to <strong>fly through this exercise<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"a-few-mental-math-shortcuts\" style=\"font-size:26px\"><strong>A Few Mental Math Shortcuts<\/strong><\/h3>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-db4b1242\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"mental-math-hack-1-constant-growth-rate-tables\" style=\"font-size:23px\"><strong>Mental Math Hack #1: Constant Growth Rate Tables<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><strong>When we have constant growth rates in a Paper LBO<\/strong>, we can <strong>simplify growth calculations by using the rules of thumb below<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>First, most LBO deals<\/strong> involve later-stage companies with <strong>growth below 15% per year, so we\u2019ll focus on calculating Revenue growth from 0-15%<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Further, <strong>Paper LBO prompts<\/strong> <strong>often utilize even numbers (e.g., 5%, 10%, etc.).<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">So you can <strong>memorize the growth factors for five years of growth at typical growth rates<\/strong> to help you complete a Paper LBO.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As you will see shortly, you can <strong>use percentages in the tables below with the original (Year 0) Revenue<\/strong> <strong>to quickly assess Revenue in each year<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">At the very least, we <strong>strongly recommend<\/strong> memorizing the <strong>10% Annual Growth factors below<\/strong> because that growth rate is relatively common.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-8bcfcb2b\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables.png\" alt=\"A table containing growth rate factors for common Paper LBO growth rate assumptions\" class=\"wp-image-51749\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Growth-rate-tables-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Now, <strong>instead of manually calculating<\/strong> each year\u2019s Revenue, we simply <strong>apply the &#8216;Rounded Factor&#8217;<\/strong> <strong>Growth %<\/strong> in each year <strong>to the Original (&#8216;Year 0&#8217;) Revenue<\/strong>. <\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-99110c3b\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/applying-growth-factors-3.gif\" alt=\"An example of how to apply growth factors to quickly calculate future Revenue \" class=\"wp-image-51973\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">As you can see above, the <strong>cumulative Revenue with this approximate approach is incredibly close to the actual calculation<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s now <strong>try something a bit more complicated<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s say <strong>Revenue starts at $250<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If we know the factors, we can <strong>complete quick percentage calculations<\/strong> to get to Revenue for each year.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4-1024x576.png\" alt=\"An example of how to apply growth factors with a more complicated starting point\" class=\"wp-image-51972\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Complicated-growth-factor-example-4.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"another-constant-revenue-growth-shortcut\" style=\"font-size:23px\"><strong><u>Another Constant Revenue Growth Shortcut<\/u><\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">There\u2019s yet another trick to keep in mind when <strong>we have a constant<\/strong> <strong>Revenue Growth Rate assumption.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Constant Revenue growth <\/strong>allows us to <strong>reduce the number of calculations <\/strong>we need to make in a Paper LBO.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If we <strong>use our Constant Growth Rate tables<\/strong> above, we could <strong>calculate Revenue for each year and then EBITDA and Capital Expenditures; <\/strong>we would <strong>need to make 15 calculations<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-11153e68\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate.png\" alt=\"an illustration showing that you need 15 calculations with a standard Paper LBO method\" class=\"wp-image-51747\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">However, <strong>for any item that stays at a constant percentage of Revenue<\/strong>, <strong><span style=\"text-decoration: underline;\">the growth of that line item will grow in line with Revenue Growth<\/span><\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Since EBITDA and Capital Expenditures remain constant<\/strong> <strong>as a percentage of sales<\/strong>, they will simply <strong>grow in line with the rate of Revenue Growth<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a result, we can <strong>skip calculating Revenue altogether<\/strong> and use the <strong>Constant Growth Rate Factors<\/strong> above to <strong>grow EBITDA<\/strong> and <strong>Capital Expenditures<\/strong> in our Levered Free Cash Flow calculation.<\/p>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-d42f7df1\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut.png\" alt=\"an illustration showing that you can reduce the number of calculations when you have a constant growth rate.\" class=\"wp-image-51746\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/number-of-calculations-constant-growth-rate-with-shortcut-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">As you can see above, we <strong>can still calculate the EBITDA and Capital Expenditure<\/strong> value needed for the Paper LBO, but we <strong>eliminated five calculations<\/strong> in the process.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now, let\u2019s <strong>move on to the final Mental Math trick<\/strong> you should have in your toolkit for a Paper LBO exercise.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"mental-math-hack-2-rule-of-1s-5s-and-10s\" style=\"font-size:23px\"><strong>Mental Math Hack #2: Rule of 1s, 5s, and 10s<\/strong><\/h4>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-f74464d3\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages.png\" alt=\"a stick figure in an interview confused about mental math percentage calculations\" class=\"wp-image-51712\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-in-interview-mental-math-percentages-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s imagine <strong>you are in an interview<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">You have been <strong>asked to complete the calculation in the image above<\/strong> as part of a Paper LBO exercise.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>This doesn\u2019t have to be a daunting task!<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>When working through percentage calculations, break down numbers into 1%, 5%, and 10% increments.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">For example:<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>3% of any number is<\/strong>: 3 * 1%<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>15% of any number is<\/strong>: 1 * 10% and 1 * 5%<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>47% of any number is<\/strong>: 4 * 10% + 1 * 5% + 2* 1%<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We can <strong>use this to our advantage<\/strong> when working through a <strong>Paper LBO<\/strong> (or any quick calculation involving percentages).<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-4739b5a5\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process.png\" alt=\"the four-step process for the Rule of 1s, 5s, and 10s to calculate percentages\" class=\"wp-image-51737\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-process-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><strong>To work through the example above<\/strong>, we would:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li><strong>Calculate the 10% increment<\/strong> \u2013 move the decimal place. For example, 10% of $35 billion is $3.5 billion.<\/li>\n\n\n\n<li><strong>Calculate the 1% increment<\/strong> \u2013 move the decimal place again. 10% of $3.5 billion is $350 million.<\/li>\n\n\n\n<li><strong>If needed, calculate the 5% increment<\/strong> \u2013 divide $3.5 billion by 2 to arrive at $1.75 billion.<\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\">To begin with, <strong>3 *$350 million = $1.05 billion<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We can then <strong>add $1.05 billion to $3.5 billion<\/strong> to arrive at <strong>$4.55 billion<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>In short, you can create the building blocks to calculate any percentage using the Rule above.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below are a few different examples of percentage calculations<\/strong> we could create using these building blocks as additional examples.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-11958582\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Rule-of-1s-5s-10s-examples.gif\" alt=\"examples of the Rule of 1s, 5s, and 10s in action\" class=\"wp-image-51745\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Now that we have <strong>covered the core Mental Math hacks<\/strong> you will need to complete this section, let\u2019s <strong>work from Revenue to Free Cash Flow<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"revenue-and-ebitda-projections\" style=\"font-size:26px\"><strong>Revenue and EBITDA Projections<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">To kick things off here, we\u2019ll <strong>need to project out Revenue<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The prompt stated <strong>that Revenue would grow at 10% over the time horizon<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As stated above, though, <strong>when we have constant Revenue growth<\/strong>, we <strong>can skip the Revenue calculation altogether<\/strong> as long as the <strong>operating assumptions<\/strong> in the model <strong>remain the same percentage of sales<\/strong> over the projections period. &nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We were told that the <strong>EBITDA Margin would remain constant at 15%<\/strong> over the projection period.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, we can <strong>move down<\/strong> and <strong>calculate EBITDA using the Constant Growth Factors<\/strong> from above.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-34989707\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection.png\" alt=\"an example showing how to use growth factors to project EBITDA\" class=\"wp-image-51719\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-ebitda-projection-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"what-if-revenue-and-ebitda-margin-assumption-aren-t-constant\" style=\"font-size:26px\"><strong>What if Revenue and EBITDA Margin Assumption Aren\u2019t Constant?<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">If <strong>Revenue Growth or EBITDA margin varies over the projection period<\/strong>, you will need to use the <strong>Rule of 1s, 5s, and 10s<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And, as always, <strong>round where you can<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"calculate-all-remaining-cash-flow-items\" style=\"font-size:26px\"><strong>Calculate All Remaining Cash Flow Items<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">Now that we have <strong>calculated EBITDA,<\/strong> we need to work from <strong>EBITDA to Levered Free Cash Flow<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below <\/strong>we\u2019ve laid out the calculations for <strong>each item through to Levered Free Cash Flow<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1-1024x576.png\" alt=\"A list of the items needed after EBITDA to calculate levered free cash flow.\" class=\"wp-image-51994\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/remaining-items-to-get-to-levered-free-cash-flow-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"depreciation-and-amortization-expense\" style=\"font-size:26px\"><strong>Depreciation and Amortization Expense<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">To begin with, we will need to <strong>deduct Depreciation and Amortization<\/strong> (\u2018D&amp;A\u2019) to get to Profit Before Tax.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Even though it\u2019s a <strong>non-cash charge<\/strong>, D&amp;A <strong>lowers the Company\u2019s tax bill<\/strong> (via the \u2018<a href=\"https:\/\/finance-able.com\/depreciation-tax-shield\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Depreciation Tax Shield<\/span><\/strong><\/a>\u2019).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Paper LBO prompt<\/strong> stated that <strong>Depreciation would be constant at $4 per year,<\/strong> which keeps things simple.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>image below<\/strong> reflects the deduction of <strong>D&amp;A Expense<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-01896f8c\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow.png\" alt=\"an image showing deduction of Depreciation and Amortization to get to Levered Free Cash Flow.\" class=\"wp-image-51717\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/DA-included-levered-free-cash-flow-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">W<strong>e have incorporated D&amp;A<\/strong> into our <strong>Levered Free Cash Flow calculation<\/strong> and can move onto interest expense.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"interest-expense-calculations\" style=\"font-size:26px\"><strong>Interest Expense Calculations<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">In <strong>Step #1<\/strong>, we determined that <strong>Lenders would offer $60 of Debt funding<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Our <strong>Paper LBO prompt<\/strong> stated that the <strong>Interest Rate<\/strong> <strong>on Debt would be 5% <\/strong>and to assume no Debt paydown until the Sale of the Business.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As such, we will have a <strong>constant dollar value<\/strong> <strong>of<\/strong> <strong>Interest Expense<\/strong> each year.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below is the quick calculation for Interest Expense:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-8718e473\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation.png\" alt=\"a visual overview of the interest expense calculation for the Paper LBO.\" class=\"wp-image-51721\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/interest-expense-calculation-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now that we can see that <strong>Interest Expense will be $3 per year<\/strong> in all years, we can <strong>subtract Interest Expense<\/strong> to calculate <strong>Profit Before Tax (PBT)<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-13f71372\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation.png\" alt=\"an image showing the calculation of Profit Before Tax to get to Levered Free Cash Flow.\" class=\"wp-image-51734\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Profit-before-tax-calculation-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"income-tax-calculation\" style=\"font-size:26px\"><strong>Income Tax Calculation<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Paper LBO prompt<\/strong> stated that <strong>Income Tax Rate is 20%<\/strong>. &nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We will <strong>apply the 20% Rate<\/strong> to our <strong>Profit Before Tax<\/strong> (i.e., \u2018Taxable Income\u2019) to <strong>calculate<\/strong> <strong>our Taxes Owed (\u2018<\/strong>Income Tax Expense\u2019).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Once again, we <strong>can use the Rule of 1s, 5s, and 10s<\/strong> to calculate Income Tax Expense.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-f3a546bf\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation.png\" alt=\"a visual overview of the income tax expense calculation for the Paper LBO.\" class=\"wp-image-51720\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/income-tax-expense-calculation-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">With Income Tax Expense calculated, we <strong>can calculate Net Income<\/strong>.<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-aedc9071\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-e6cf09a0\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation.png\" alt=\"an image showing the calculation of Net Income to get to Levered Free Cash Flow.\" class=\"wp-image-51729\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/net-income-calculation-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">From this point, we need to make <strong>just a few more adjustments<\/strong> to get to <strong>Levered Free Cash Flow<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"d-a-capital-expenditures-and-net-working-capital\" style=\"font-size:26px\"><strong>D&amp;A, Capital Expenditures, and Net Working Capital<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">Going back to an earlier step, we <strong>deducted D&amp;A Expense because it lowers our tax bill<\/strong>, but D&amp;A is a <strong>non-cash charge<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So we now <strong>need to add back D&amp;A Expense<\/strong> to calculate Levered Free Cash Flow.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With <strong>Capital Expenditures (\u2018CapEx\u2019)<\/strong>, we could <strong>use the percentage of sales calculation<\/strong> provided in the prompt.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>But remember that we didn\u2019t project out Revenue.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <strong>CapEx remains constant<\/strong> as a <strong>percentage of sales<\/strong> over the projection period.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So we can <strong>apply the same growth factors<\/strong> as before <strong>to project CapEx<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-72e5fa9b\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection.png\" alt=\"an example showing how to use growth factors to project CapEx\" class=\"wp-image-51718\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/growth-factor-capex-projection-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-afe3be10\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Finally, the <strong>Paper LBO prompt<\/strong> stated that <strong>Net Working Capital would use up $2 of Cash each year<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We <strong>can now complete the calculation down to Levered Free Cash Flow<\/strong>, which you can see below.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-f7ddc7a9\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation.png\" alt=\"an image showing the full calculation of Levered Free Cash Flow.\" class=\"wp-image-51726\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/levered-free-cash-flow-calculation-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In total, <strong>you will have $28 of Cumulative Levered Free Cash Flow to pay down Debt at the Exit<\/strong> (at the end of Year 5).<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Curious as to what you would have calculated if you were working in a spreadsheet? <\/strong><\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18px\">Drum roll&#8230;<\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>$29 of Cumulative Levered Free Cash Flow. <\/strong><\/p>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-d28b3ae8\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As you can see, <strong>even with a little bit of rounding<\/strong>, you arrive at <strong>nearly the same exact answer<\/strong>!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">On that note, we will <strong>take this a step further<\/strong> and <strong>just say the business will generate $30 of Cumulative Levered Free Cash Flow<\/strong> to make our lives easier as we move ahead. <\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Congrats, you\u2019ve completed step #3!<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Before we continue to Step #4<\/strong>, let\u2019s talk about a <strong>few common complications<\/strong> that can arise with <strong>Levered Free Cash Flow calculations in a<\/strong> <strong>Paper LBO exercise<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"calculation-note-1-capex-and-depreciation\" style=\"font-size:26px\"><strong>Calculation Note #1: CapEx and Depreciation<\/strong><\/h4>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-0b0e46e9\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption.png\" alt=\"an image showing a stick figure confused about D&amp;A assumptions in a Paper LBO\" class=\"wp-image-51714\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-DA-assumption-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">For a <strong>Paper LBO<\/strong>, we will typically <strong>calculate Capital Expenditures and Depreciation<\/strong> as a <strong>percentage of Sales unless a constant number is provided<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">But <strong>sometimes<\/strong>, the prompt will <strong>only provide one of the two items<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Here\u2019s how to deal with that situation.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">For a mature Business, <strong>Capital Expenditures<\/strong> should roughly equal <strong>Depreciation<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <strong>most LBO transactions<\/strong> will <strong>involve a mature business<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-0d3f6005\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-mature-business.gif\" alt=\"an image showing that LBO transactions typically occur with late-stage businesses\" class=\"wp-image-51768\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><em>For more on <strong>why Leveraged Buyouts typically<\/strong> occur with <strong>mature businesses<\/strong>, check out this <\/em><strong><em><a href=\"https:\/\/youtu.be\/7ZN2XJPwN-Q\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Animated Explainer Video<\/span><\/a><\/em><\/strong><em>.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, it is <strong>generally reasonable<\/strong> in a <strong>Paper LBO exercise<\/strong> to assume that the <strong>target business is mature<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As such, <strong>if the Interviewer does not provide D&amp;A<\/strong>, you can usually <strong>assume that CapEx = D&amp;A<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <strong>vice versa<\/strong>, if you are <strong>only given D&amp;A<\/strong>, you could assume that <strong>D&amp;A roughly approximates CapEx<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Before making this assumption,<\/strong> you should <strong>always say<\/strong> something like, \u2018<strong><em>I\u2019m going to assume CapEx = D&amp;A. Is that OK?<\/em><\/strong>\u2019<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"calculation-note-2-income-taxes\" style=\"font-size:26px\"><strong>Calculation Note #2: Income Taxes<\/strong><\/h4>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-a878ebd1\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates.png\" alt=\"a comparison of the Tax Rate before tax reform and now\" class=\"wp-image-51730\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/old-vs-new-tax-rates-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><strong>Prior to the <\/strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_Cuts_and_Jobs_Act_of_2017\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Tax Reform in 2017<\/span><\/strong><\/a>, the <strong>US Corporate Tax Rate<\/strong> was in the <strong>range of 35-40%,<\/strong> depending on a Company\u2019s Taxable Income.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Since 2018, the <strong>Federal Tax Rate has been 21%. Additional State and Local Taxes<\/strong> often lead to an <strong>all-in 25%-26% Tax Rate<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To keep it simple, we <strong>recommend using a 20% Tax Rate<\/strong> if the tax rate is not provided for a Paper LBO.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Despite the changes above, <strong>some Paper LBO cases<\/strong> will <strong>use the 40% Tax Rate<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In that case, you can <strong>just use (4 * 10% Tax Rate)<\/strong> to calculate Income Taxes. <\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"calculation-note-3-nwc-source-uses-of-cash\" style=\"font-size:26px\"><strong>Calculation Note #3: NWC \u2013 Source &amp; Uses of Cash<\/strong><\/h4>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-58b943c9\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash.png\" alt=\"an image showing a stick figure confused about sources and uses of cash calculations in a Paper LBO\" class=\"wp-image-51713\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-sources-and-uses-of-cash-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><strong>Net Working Capital (NWC) is a bit different<\/strong> than the other items in the calculations, as you can see.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, we are <strong>calculating<\/strong> whether the <strong>aggregate of working Capital<\/strong> is a net <strong>Source of Cash<\/strong> or <strong>Use of Cash<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>If you\u2019re not familiar<\/strong> with the mechanics of these calculations, <strong>check out this video<\/strong> on <strong><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/youtu.be\/eMKESGkF2F4\" target=\"_blank\" rel=\"noreferrer noopener\">Net Working Capital<\/a><\/span><\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"calculation-note-4-nwc-the-assumption\" style=\"font-size:26px\"><strong>Calculation Note #4: NWC \u2013 The Assumption<\/strong><\/h3>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-50348dbe\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption.png\" alt=\"an image showing a stick figure confused about Net Working Capital assumptions in a Paper LBO\" class=\"wp-image-51715\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/a-stick-figure-without-NWC-assumption-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In <strong>most Paper LBO cases<\/strong>, the <strong>Interviewer will provide<\/strong> a <strong><a href=\"https:\/\/youtu.be\/eMKESGkF2F4\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Net Working Capital<\/span><\/a><\/strong> as a <strong>Percentage of Sales assumption or a Constant Dollar Value<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In the event that the <strong>Interviewer doesn\u2019t provide that assumption<\/strong>, you could say: \u2018<em>For simplicity\u2019s sake, can we assume that Net Working Capital equals zero?\u2019<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">If they say <strong>yes<\/strong>, <strong>life is easy<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">However, if they say <strong>no<\/strong>, then <strong>ask what a reasonable assumption<\/strong> should be. Then off you go!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">One last note here. <\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Some businesses<\/strong> can have <a href=\"https:\/\/finance-able.com\/negative-working-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Negative Working Capital<\/span><\/strong><\/a><strong>,<\/strong> which results in a <strong>Cash Inflow as a business grows<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If you are <strong>not familiar<\/strong> with the <strong>concept of Negative Working Capital<\/strong>, check out this <strong><a href=\"https:\/\/youtu.be\/Mm-NHsy3Brc\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Quick Video<\/span><\/a> walkthrough<\/strong> of all of the mechanics.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Once you <strong>have incorporated all of the above items<\/strong>, you\u2019ll arrive at <strong>Cash Flow<\/strong> for each year of the Paper LBO.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\">With those points covered, we can move on to the <strong>next step,<\/strong> which is our <strong>Exit Analysis<\/strong>.<\/p>\n\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-step-4-create-exit-analysis\" style=\"font-size:35px\"><strong>Paper LBO Step #4: Create Exit Analysis<\/strong><\/h2>\n\n\n\n<div style=\"height:5px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-021f1209\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">We will assume that the <strong>Private Equity Fund sells the Business at the end of the five-year projection period<\/strong>, as noted in the prompt.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this step, we <strong>need to determine the Sale Value<\/strong> of the Business (again, \u2018<a href=\"https:\/\/finance-able.com\/enterprise-value-vs-equity-value\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Enterprise Value<\/span><\/strong><\/a>\u2019).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">From there, we will <strong>incorporate both Debt and Cash<\/strong> to <strong>calculate the Net Proceeds (&#8216;Equity Value&#8217;) to the PE Fund<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-22478c9e\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process.png\" alt=\"A diagram showing the key steps in an LBO exit analysis\" class=\"wp-image-51724\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-process-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">When the PE fund puts a Business up for sale, a <strong>Prospective Buyer<\/strong> will typically <strong>use the same valuation approach we saw earlier<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In other words, <strong>the Buyer will assess<\/strong> the Company\u2019s <strong>EBITDA at the time of Sale<\/strong>, typically for the <strong>most recent <\/strong><a href=\"https:\/\/finance-able.com\/ltm-revenue\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">\u2018Last Twelve Months\u2019 or \u2018LTM\u2019<\/span><\/strong><\/a><strong> period<\/strong>.<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-aedc9071\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-center\" id=\"calculating-the-enterprise-value-at-sale\" style=\"font-size:28px\"><strong>Calculating the Enterprise Value at Sale<\/strong><\/h3>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-af21a01c\"><\/div>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-6a0ccef1\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/seller-assessing-company-to-buy-based-on-LTM-EBITDA.gif\" alt=\"A seller assessing a business that a Private Equity Investor has put up for Sale based on LTM EBITDA.\" class=\"wp-image-51767\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">In our Paper LBO, the <strong>LTM period<\/strong> would be <strong>EBITDA in the final year of our projections<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Once we have <strong>calculated the Sale Value,<\/strong> we can then <strong>calculate the Net Sale Proceeds<\/strong> (i.e., Exit Equity Value) to the <strong>Private Equity Fund<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To <strong>get to Net Proceeds<\/strong>, we need to <strong>subtract Debt and add Cash<\/strong> at the time of the sale (i.e., the end of Year 5).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, we\u2019ll <strong>take the Debt we initially used to fund the Transaction<\/strong> and <strong><em><u>subtract<\/u><\/em><\/strong> the <strong>Cumulative Cash Flow<\/strong> generated by the Business over the projection period.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>net of Debt and Cumulative Cash Flow <\/strong>is what the Private Equity fund will <strong>have to pay down before collecting and Sale Proceeds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below, you can see the <strong>complete calculation from the Exit Sale Value to Net Proceeds (&#8216;Equity Value<\/strong>&#8216;).<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-963d43e5\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/LBO-Exit-Analysis-Calculations.gif\" alt=\"An image showing the calculations from Exit Sale Value to Equity Value in a Paper LBO\" class=\"wp-image-51766\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Now that <strong>we have determined how much money the PE firm will take home<\/strong>, we can <strong>move on to Step #5 and assess the returns<\/strong> from the deal.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"paper-lbo-step-5-assess-returns\" style=\"font-size:35px\"><strong>Paper LBO Step #5: Assess Returns<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong>After we calculate the net proceeds<\/strong>, we can then <strong>assess the returns of the Deal to the Private Equity Investors<\/strong>!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We will need the two items for this calculation: the <strong>Dollars Invested<\/strong> (\u2018Sponsor Equity\u2019 from Step #2) and <strong>Dollars Returned<\/strong> (\u2018Net Proceeds\u2019 from Step #4).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In Private Equity, there are <strong>two standard return metrics<\/strong>: <strong>Internal Rate of Return<\/strong> (IRR) and <strong>Multiple of Invested Capital<\/strong> (MOIC).<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-2f119592\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-high-level-overview.gif\" alt=\"An image contrasting the Internal Rate of Return with Multiple of Invested Capital.\" class=\"wp-image-51765\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><strong>MOIC<\/strong> reflects purely <strong>Dollars Returned vs. Dollars Invested<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In contrast, <strong>IRR<\/strong> reflects an <strong>implied annualized percentage return for the Investors<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em>Note: There is a more complicated calculation for IRR, but it is beyond the scope of a Paper LBO discussion.<\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below are the summary calculations for each:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-51e46793\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO.png\" alt=\"an image showing how to calculate the internal rate of return and multiple of invested capital in a Paper LBO\" class=\"wp-image-51723\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/irr-vs-MOIC-calculations-for-paper-LBO-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><br>At this point, you might be thinking, \u2018<strong>I think I can do MOIC, but how am I supposed to calculate IRR in my head?!?!<\/strong>\u2019<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>You\u2019re in luck. You don\u2019t have to!<\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"mental-math-hack-3-moic-to-irr-table\" style=\"font-size:26px\"><strong>Mental Math Hack #3: MOIC to IRR Table<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">We can use a well-known rule of thumb to <strong>approximate to IRRs based on the MOIC of a Deal<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Nearly everyone who works on the \u2018<\/strong><a href=\"https:\/\/finance-able.com\/buyside-vs-sellside\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Buy-Side<\/span><\/strong><\/a><strong>\u2019 commits these tables to memory.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">But of course, <strong>they will not tell you that before you Interview<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-b5fb969c\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table.png\" alt=\"an image with a table for quick calculations from MOIC to IRR\" class=\"wp-image-51727\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">With these tables, you can <strong>roughly approximate the 3 and 5-Year IRR for an LBO using the MOIC<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For example, in our case, <strong>MOIC is 2.8x ($170 Equity Returned \/ $60 Equity Invested).<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, you could say that the <strong>IRR is about three-quarters of the way between 2.5x (20% IRR) and 3.0x (25% IRR). <\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">And, so, the <span style=\"text-decoration: underline;\"><strong>approximate IRR is 23-24%<\/strong><\/span><strong>.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>The actual, <span style=\"text-decoration: underline;\">calculated IRR is 22%<\/span> so, again, we are not far off.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As you can see above, you can <strong>get very close to the IRR without crazy mental math<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-1ab06075\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview.png\" alt=\"an image showing a stick figure performing IRR mental math calculations in an interview\" class=\"wp-image-51739\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Stick-figure-calculating-irr-interview-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"the-reverse-paper-lbo\" style=\"font-size:35px\"><strong>The Reverse Paper LBO<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s now imagine that <strong>you\u2019ve passed the initial Core Paper LBO test<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">You have <strong>calculated the Approximate IRR as 23-24%.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">At this point, you are <strong>feeling pretty proud of yourself<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Then the Interviewer says, \u201c<strong>What level of EBITDA growth would you need to get to a 25% IRR?<\/strong>\u201d<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>You can\u2019t create a sensitivity analysis on the spot. You\u2019re not a supercomputer!<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As <strong>you would probably guess <\/strong>at this point, you <strong>do not need to be a computer<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Jump ahead to see how to nail this exercise with ease!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Again, before we dive in, it is worth mentioning that <strong>the exercise we are about to work<\/strong> through is <strong>constantly used on the job in Private Equity<\/strong>!<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-afe3be10\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-center\" id=\"the-5-steps-for-a-reverse-paper-lbo\" style=\"font-size:32px\"><strong>The 5 Steps for a Reverse Paper LBO<\/strong><\/h3>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-6ee4874f\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps.png\" alt=\"the five steps to complete the Reverse Paper LBO\" class=\"wp-image-51736\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Reverse-paper-LBO-5-Steps-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">To work through this exercise, you\u2019ll need to complete the following steps:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li><strong>Calculate Target Equity at Exit<\/strong> &#8211; work from Starting Equity to Ending Equity using the T arget MOIC.<\/li>\n\n\n\n<li><strong>Calculate Net Debt at Exit<\/strong> &#8211; work to Ending Net Debt by taking Debt from the Sources &amp; Uses and Subtracting the Cumulative Cash Flow from the Core Paper LBO.<\/li>\n\n\n\n<li><strong>Calculate Exit Enterprise Value<\/strong> \u2013 add Ending Equity and Ending Net Debt.<\/li>\n\n\n\n<li><strong>Determine Exit EBITDA<\/strong> \u2013 divide Exit Enterprise Value by the Entry Multiple to determine the required Exit EBITDA.<\/li>\n\n\n\n<li><strong>Calculate Implied Annual EBITDA Growth <\/strong>&nbsp;&#8211; approximate to an annual growth rate in EBITDA.<\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\"><strong>This probably looks like quite a lot at first glance.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">But <strong>it is just the flip of the Core Paper LBO<\/strong> we just completed.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Lets&#8217; dive in!<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"reverse-paper-lbo-step-1-calculate-target-equity-at-exit\" style=\"font-size:26px\"><strong>Reverse Paper LBO Step #1: Calculate Target Equity at Exit<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">If we target<strong> a return of 3.0x (or 25% IRR)<\/strong>, then <strong>every dollar we invest<\/strong> needs to <strong>become three dollars at the end of Year 5<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, the first step here is to <strong>multiply the Initial Equity Investment by 3.0x<\/strong> to arrive at the <strong>required Exit Equity of $180<\/strong>, which you can see below:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-a0cf856e\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-Exit-Equity-Value.gif\" alt=\"an image showing how to calculate exit equity value for the reverse paper LBO.\" class=\"wp-image-51764\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:90px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-6a209336\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"reverse-paper-lbo-step-2-calculate-net-debt-at-exit\" style=\"font-size:26px\"><strong>Reverse Paper LBO Step #2: Calculate Net Debt at Exit<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">Next, we need to<strong> calculate the value of Debt and Cash at the end of Year 5<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We can <strong>take the starting Debt from our Sources and Uses from Step #2 of the Core LBO.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">And we can take the <strong>Cumulative Cash Flow<\/strong> <strong>from Step #3 of the Core LBO.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">We would then <strong>subtract cumulative Cash Flow from Debt<\/strong> to arrive at the <strong>level of Debt that the Private Equity Fund must pay down at Exit<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-bc320a7c\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-Exit-Net-Debt.gif\" alt=\"an image showing how to calculate to exit Net Debt for the reverse paper LBO\" class=\"wp-image-51763\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:90px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-6a209336\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"reverse-paper-lbo-step-3-calculate-exit-enterprise-value\" style=\"font-size:26px\"><strong>Reverse Paper LBO Step #3: Calculate Exit Enterprise Value<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">We then <strong>combine Exit Equity and Exit Net Debt<\/strong> to arrive at the <strong>required Exit Enterprise Value<\/strong> at the time of Sale.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In other words, this is the <strong>Valuation (in dollar terms)<\/strong> that we would <strong>need to sell at to achieve the target return of 3.0x (25% IRR)<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-a9a4323c\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-Exit-Enterprise-Value.gif\" alt=\"an image showing how to calculate the Required Exit Enterprise Value for the reverse paper LBO\" class=\"wp-image-51762\"\/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">Next, we will <strong>use this Targeted Exit Enterprise<\/strong> value to <strong>determine the required EBITDA at Exit<\/strong>.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"reverse-paper-lbo-step-4-determine-exit-ebitda\" style=\"font-size:26px\"><strong>Reverse Paper LBO Step #4: Determine Exit EBITDA<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">To <strong>find the required EBITDA at Exit<\/strong>, we <strong>divide the Exit Enterprise Value<\/strong> by the expected <strong>EV\/EBITDA Multiple<\/strong> in Year 5.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In PE, it is <strong>generally OK to assume the Exit EV\/EBITDA Multiple<\/strong> is the <strong>same as the Entry <\/strong>multiple.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">While there are exceptions to this Rule, you <strong>can safely make this assumption in a Paper LBO exercise<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Below we make that assumption<\/strong>, and you can see that the <strong>Business will need to generate about $25M of EBITDA<\/strong> to achieve the targeted return.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-86b84cf2\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/Calculate-Exit-EBITDA-2.gif\" alt=\"an image showing how to calculate the Required Exit EBITDA for the reverse paper LBO\" class=\"wp-image-52078\"\/><\/figure>\n<\/div>\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"reverse-paper-lbo-step-5-calculate-implied-annual-ebitda-growth\" style=\"font-size:26px\"><strong>Reverse Paper LBO Step #5: Calculate Implied Annual EBITDA Growth<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">At this point, we can <strong>take the starting EBITDA and the Ending EBITDA<\/strong> and <strong>determine the approximate annual growth<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For <strong>low growth rates<\/strong>, you could likely get away with a <strong>simple average<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For example, if <strong>Exit EBITDA is 15% higher than at Entry<\/strong>. We could say\u2026<strong>roughly 3% per year (15% \/ 5)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>The actual answer is 2.8%, which is not far off from our estimate.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">For <strong>high growth rates (10% or more)<\/strong>, you can <strong>anchor back to the MOIC to IRR table<\/strong> we used earlier.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below we <strong>added a threshold for 10% as a point of reference<\/strong> for the <strong>typical five-year time horizon<\/strong>.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full advgb-dyn-ccb1dad8\"><img loading=\"lazy\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO.png\" alt=\"an image with a table for quick calculations from MOIC to IRR for the Reverse Paper LBO\" class=\"wp-image-51728\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO.png 1280w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/MOIC-to-IRR-conversion-table-reverse-LBO-624x351.png 624w\" sizes=\"auto, (max-width: 1280px) 100vw, 1280px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\">In our case, you would <strong><u>need<\/u> to believe that EBITDA grows<\/strong> from <strong>$15 to $25 over five years<\/strong> (~1.7x).&nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Looking at the table above, we see that <strong>10% growth is a 1.6x increase<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, <strong>EBITDA would need to grow<\/strong> <strong>just over 10%<\/strong> per year to achieve a <strong>3.0x (25% IRR Return)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>fully<\/strong> <strong>calculated answer is 12% per year<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As you can see, we were <strong>very close with our rules of thumb<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>From this point<\/strong>, you should discuss<strong> the two key drivers that would get you there<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue Growth<\/li>\n\n\n\n<li>EBITDA Margin Expansion<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">As a <strong>final note<\/strong>, we are <strong>anchoring<\/strong> to the <strong>Cash Flow<\/strong> generated in the <strong>original case<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, this <strong>approach is approximately correct<\/strong>. However, the <strong>further the Target Return <\/strong>is from the IRR of the Original Case, the less accurate you&#8217;ll be.<\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"advanced-paper-lbo-variations\" style=\"font-size:35px\"><strong>More Advanced Paper LBO Variations<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\">So\u2026we <strong>have worn ourselves out writing everything you see in this article<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, we\u2019re taking a little break for now.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">From here, there are <strong>quite a few additional topics<\/strong> to cover <strong>related to Paper LBOs<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>A few sample topics are:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>How to cut Levered Free Cash Flow Calculation time down by ~60%<\/li>\n\n\n\n<li>How to convert IRR to MOIC<\/li>\n\n\n\n<li>LTM vs NTM Multiples<\/li>\n\n\n\n<li>Inconsistent projections in the case prompt<\/li>\n\n\n\n<li>Multiple pieces of Debt Funding with annual Paydown<\/li>\n\n\n\n<li>Preferred Equity<\/li>\n\n\n\n<li>Management Option Pools<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">We also plan to put together a <strong>comprehensive Paper LBO Excel Template<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>We<\/strong> <strong>will accelerate Part 2 of this article<\/strong> (plus the template) to elaborate on the topics <strong>above if we get enough interest<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><span class=\"has-inline-color has-luminous-vivid-orange-color\">Once we cross 500 sign-ups below, we get to work on the topics above.<\/span><\/strong><\/p>\n\n\n\n\n\n\n<p style=\"font-size:18.5px\"><strong>In the meantime, we hope you\u2019ve found this helpful.<\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"wrap-up-the-paper-lbo\" style=\"font-size:35px\"><strong>Wrap-Up: The Paper LBO<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1-1024x576.png\" alt=\"An image of a stick figure sitting at a desk understanding\" class=\"wp-image-52085\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2022\/01\/stick-figure-understanding-paper-LBO-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Hopefully<\/strong>, you now have a <strong>much better understanding of<\/strong> the <strong>Paper LBO Process<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And also understand the <strong>underlying idea<\/strong> behind each of the steps.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Let us know if you have any questions in the comments below. We\u2019d love to hear from you!<\/strong><strong><\/strong><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"about-the-author\" style=\"font-size:35px\"><strong>About the Author<\/strong><\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignleft size-full is-resized advgb-dyn-cb2f2274\"><img loading=\"lazy\" decoding=\"async\" width=\"500\" height=\"500\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg\" alt=\"Picture of Mike Kimpel, Founder of Finance|able\" class=\"wp-image-26350\" style=\"width:266px;height:266px\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg 500w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-300x300.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-100x100.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-150x150.jpg 150w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-50x50.jpg 50w\" sizes=\"auto, (max-width: 500px) 100vw, 500px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:18.5px\"><a href=\"https:\/\/finance-able.com\/about-us\/\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Mike Kimpel<\/mark><\/strong><\/a> is the <strong>Founder and CEO<\/strong> of <strong>Finance|able<\/strong>, a next-generation Finance Career Training platform. Mike has worked in Investment Banking, Private Equity, Hedge Fund, and Mutual Fund roles during his career.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">He is an <strong>Adjunct Professor<\/strong> in <strong>Columbia Business School&#8217;s <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/business.columbia.edu\/heilbrunn\" target=\"_blank\" rel=\"noreferrer noopener\">Value Investing Program<\/a><\/mark><\/strong> and leads the Finance track at <a href=\"https:\/\/www.accessdistributed.org\/\" target=\"_blank\" rel=\"noreferrer noopener\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Access Distributed<\/strong><\/mark><\/a>, a non-profit that creates access to top-tier Finance jobs for students at non-target schools from underrepresented backgrounds.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p><\/p>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"frequently-asked-questions\" style=\"font-size:35px\"><strong>Frequently Asked Questions<\/strong><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1643144277284\"><strong class=\"schema-faq-question\"><strong><em>What is a Paper LBO?<\/em><\/strong><\/strong> <p class=\"schema-faq-answer\">A <strong>Paper LBO<\/strong> is the process in which you complete a <strong>full LBO analysis with just pen and paper<\/strong>.<br\/><\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1643144318260\"><strong class=\"schema-faq-question\"><strong><em>How long should a Paper LBO take?<\/em><\/strong><br\/><\/strong> <p class=\"schema-faq-answer\">In <strong>most cases, you will be given 10-15 minutes <\/strong>to work through the Paper LBO. However, this can vary depending on the difficulty of the case.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1643144349590\"><strong class=\"schema-faq-question\"><strong><em>Can you use a calculator or a Paper LBO?<\/em><\/strong><\/strong> <p class=\"schema-faq-answer\">You are <strong>generally not allowed to use a calculator<\/strong>. The trick here is to <strong>learn a few mental math tricks<\/strong> (see above) that help you work through complicated calculations.<\/p> <\/div> <\/div>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-related-links\" style=\"font-size:35px\"><strong>Related Links<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-yoast-seo-related-links yoast-seo-related-links\">\n<li><strong><a href=\"https:\/\/finance-able.com\/walk-me-through-an-lbo\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Walk Me Through an LBO<\/span><\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity vs Venture Capital<\/span><\/a><\/strong><\/li>\n\n\n\n<li><a href=\"https:\/\/finance-able.com\/buyside-vs-sellside\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Buy-Side vs Sell-Side<\/span><\/strong><\/a><\/li>\n<\/ul>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer advgb-dyn-f7403d89\"><\/div>\n\n\n<div class=\"yoast-breadcrumbs\"><span><span><a href=\"https:\/\/finance-able.com\/\">Home<\/a><\/span> \u00bb <span class=\"breadcrumb_last\" aria-current=\"page\">The Paper LBO in 5 Steps \u2013 The Ultimate Guide<\/span><\/span><\/div>\n\n\n<p><a><\/a><\/p>\n<style class=\"advgb-styles-renderer\">.kb-table-of-content-nav.kb-table-of-content-id_fabc14-6f .kb-table-of-content-wrap{margin-top:42px;margin-right:42px;margin-bottom:42px;margin-left:42px;padding-top:10px;padding-right:10px;padding-bottom:10px;padding-left:10px;background-color:#f4f4f4;border-top:3px solid currentColor;border-right:3px solid currentColor;border-bottom:3px solid currentColor;border-left:3px solid 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