Finance · level 3

LBO quick math

Three levers make the return: EBITDA growth, multiple change and debt paydown. Size the entry cheque, build the exit equity, divide — then convert the multiple into an IRR.

Theory: Valuation

Worked example: Enter at 9× on $120M EBITDA with 4× debt. EBITDA grows 8%/yr for 3 years, half the debt is repaid, exit at 9×. Money multiple?

entry equity$600M

exit equity$1.12B

MoM1.87×

IRR23.2%

Step by step

1
Entry equity cheque
$1.08B EV − $480M debt = $600M
2
Exit EBITDA
$120M × 1.26 = $151.17M
3
Exit EV
$151.17M × 9 = $1.36B
4
Less remaining debt
− $240M = $1.12B
5
Money multiple
$1.12B / $600M = 1.87×
6
IRR by the rule of 72
About 23.2% a year over 3 years.

Enter at 9× on $120M EBITDA with 4× debt. EBITDA grows 8%/yr for 3 years, half the debt is repaid, exit at 9×. Money multiple? = 1.87

The theory behind it

Intuition

LBO returns come from three sources: EBITDA growth, multiple expansion and debt paydown. Money-on-money over the hold gives you IRR via the rule of 72.

Common pitfalls

×Forgetting to subtract net debt at exit.
×Assuming the exit multiple equals the entry multiple without saying so.

In the interview

PE cases — the classic 'does this deal clear 20% IRR?' round.