LBO Series · Guide 04

Reverse LBO Walkthrough

Start from your target return and back into the maximum purchase price you can pay. This is how PE firms anchor first-round bids — and what interviewers test when they want to see real modeling intuition.

What Is a Reverse LBO?

In a forward LBO model, you assume a purchase price and calculate the resulting IRR. In a reverse LBO, you flip the logic: you start with a target IRR (say, 20%) and solve backwards for the maximum purchase price that still achieves that return.

This is practically useful when a banker asks "what price can you get to?" or when you need to anchor a bid before you've built the full model.

The Worked Example

Same company as the walkthrough: $500M LTM EBITDA, 5% annual growth. You want to achieve a minimum 20% IRR over a 5-year hold. Exit at 9.0x EBITDA. Standard leverage of 5.0x EBITDA available.

Step 1 — Determine Exit Equity Value

Project EBITDA forward 5 years at 5% growth: $500M × (1.05)^5 = $638M. Exit at 9.0x:

Exit EV = $638M × 9.0x = $5,745M

Estimate remaining debt at exit. You entered with 5.0x leverage ($2,500M with $500M EBITDA). Over 5 years, the company pays down roughly $800M–$1,000M in debt based on FCF generation (we'll use $900M as an estimate).

Estimated Remaining Debt = $2,500M − $900M = $1,600M

Exit Equity Value = $5,745M − $1,600M = $4,145M

Step 2 — Solve for Required Entry Equity

At a 20% IRR over 5 years, $1 of equity grows to:

MOIC at 20% IRR, 5 years = (1.20)^5 = 2.49x

To end with $4,145M in equity at 2.49x MOIC:

Maximum Entry Equity = $4,145M ÷ 2.49x = $1,664M

Step 3 — Back Into Maximum Purchase Price

If debt available is 5.0x entry EBITDA ($2,500M at $500M EBITDA), then maximum total EV is:

Max Entry EV = Entry Equity + Entry Debt = $1,664M + $2,500M = $4,164M

Implied Entry Multiple = $4,164M ÷ $500M = 8.3x EBITDA

Reverse LBO Summary

Item	Value
Target IRR	20%
Hold Period	5 years
Required MOIC	2.49x
Exit EBITDA (Y5)	$638M
Exit Multiple	9.0x
Exit EV	$5,745M
Estimated Exit Debt	($1,600M)
Exit Equity	$4,145M
Max Entry Equity	$1,664M
Available Debt (5.0x)	$2,500M
Maximum Purchase Price	$4,164M (8.3x)

How the Estimate Changes at Different Return Thresholds

Maximum Entry Multiple by Target IRR

Target IRR	Required MOIC (5yr)	Max Entry Equity ($M)	Max Entry EV ($M)	Implied Multiple
15%	2.01x	$2,062M	$4,562M	9.1x
18%	2.29x	$1,810M	$4,310M	8.6x
20%	2.49x	$1,664M	$4,164M	8.3x
22%	2.70x	$1,535M	$4,035M	8.1x
25%	3.05x	$1,359M	$3,859M	7.7x
30%	3.71x	$1,117M	$3,617M	7.2x

The Core Insight

Every 5 percentage points of additional IRR target reduces your maximum purchase price by roughly 0.5x–1.0x EBITDA. This is why competitive auction dynamics matter — when multiple funds compete, they all do the same reverse LBO and the winner is often the one who either has lower return targets or can model higher EBITDA growth.

Key Assumptions That Shift the Answer

Exit multiple assumption — Going from 9.0x exit to 10.0x exit increases the maximum entry price by roughly 0.4x–0.5x EBITDA. Exit assumptions matter more than most people realize.
Debt paydown estimate — If you're wrong about debt paydown (e.g., FCF is lower due to working capital needs), your exit equity is lower and the max bid shrinks.
Leverage availability — Each additional turn of leverage available adds roughly one turn to the maximum purchase price, assuming equity check stays constant.
EBITDA growth — At 3% vs. 7% annual growth, the exit EBITDA difference is $637M vs. $702M — a $585M swing in exit EV at 9.0x. That's directly additive to equity value and therefore maximum bid.

When to Use This in an Interview

You'll use reverse LBO logic when asked:

"What's the maximum price you'd pay for this business?"
"If you need a 25% IRR, what does that imply for your entry multiple?"
"How do you anchor your bid in a competitive process?"
"At what entry multiple does the deal stop working?"

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