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Standard 3-Statement LBO Model Walkthrough

A step-by-step build of a full leveraged buyout model using a $500M EBITDA company acquired at 5.5x. Every section explained so you understand the mechanics — not just the inputs.

The Setup: What We're Buying

Before touching a spreadsheet, establish the facts of the deal. In interviews, you'll be given these upfront.

Step 1 — Sources & Uses

This is the accounting of the transaction. Where does the money come from (sources) and where does it go (uses)?

Uses (What We're Paying For)

Start with the purchase price. At 5.5x entry on $500M EBITDA:

Sources (Where the Money Comes From)

Typical PE deal: 50–65% debt, remainder equity. Here we use 5.5x total leverage on EBITDA, split across tranches.

Step 2 — Operating Model (5-Year Projections)

Project the income statement forward. In a basic LBO model, you'll assume revenue growth and margin, then derive EBITDA. Keep it simple — PE models don't need bottom-up revenue builds for most interviews.

Step 3 — Debt Schedule & Cash Sweep

This is the heart of an LBO model. Every year, free cash flow pays down debt. The faster debt pays down, the higher the equity return. The model is circular: less debt → less interest → more FCF → even less debt.

Free Cash Flow Calculation

Debt Paydown (Cash Sweep)

All FCF is swept to debt, starting with the most expensive tranche. Senior Notes at 8.5% get paid first, then the TLB.

Step 4 — Exit & Returns

After 5 years, the sponsor sells. Exit valuation is typically applied as a multiple on Year 5 EBITDA.

Exit at 5.5x (Same as Entry)

Step 5 — Equity Value Bridge

Always be able to decompose your returns into their component drivers. Interviewers love this question.

Common Interview Follow-Ups

• "What happens to IRR if we hold for 7 years instead of 5?" — IRR compresses because you're dividing the same gain over more time. Rule of thumb: each additional year of hold drops IRR ~3–5 percentage points in this range.
• "If EBITDA grows faster but we exit at a lower multiple, what wins?" — EBITDA growth almost always matters more than multiple expansion/compression. A 20% EBITDA increase outweighs a 0.5x multiple contraction.
• "What's the minimum EBITDA to service this debt?" — Back-of-envelope: Total interest expense in Y1 is ~$200M. You need at least 1.5x–2.0x interest coverage to keep lenders comfortable, implying minimum EBITDA of $300–$400M.
• "What drives IRR more — growth or debt paydown?" — In the early years of a hold, debt paydown dominates because leverage is high. By Year 5, EBITDA growth becomes the bigger driver as debt shrinks.