## What is an LBO Model Test?

The **LBO Model Test** refers to a common interview exercise given to prospective candidates during the private equity recruiting process.

Usually, the interviewee will receive a “prompt,” which contains a description containing a situational overview and certain financial data for a hypothetical company contemplating a leveraged buyout.

Upon receipt of the prompt, the candidate will build an LBO model using the assumptions provided to calculate the return metrics, i.e. the internal rate of return (IRR) and the multiple on invested capital (“MOIC”).

## Basic LBO Model Test: Practice Step-by-Step Tutorial

The following LBO model test is an appropriate place to start to ensure you understand the modeling mechanics, particularly for those starting to prepare for private equity interviews.

But for investment banking analysts interviewing for PE, expect more challenging LBO modeling tests like our Standard LBO modeling test or even an advanced LBO modeling test.

The format for the basic LBO model is as follows.

**Excel Usage:**Unlike the paper LBO, which is a pen-and-paper exercise given in earlier stages of the PE recruiting process, in an LBO Modeling Test candidates are given access to Excel and expected to construct an operating and cash flow forecast, financing sources & uses and ultimately determine the implied investment returns and other key metrics based on the information provided in the prompt.**Time Limit:**The various LBO Excel modeling tests you encounter throughout the recruitment process will most commonly be either 30 minutes, 1 hour or 3 hours depending on the firm and how near you are to the final stage before offers are made. The one covered in this post should take approximately one hour at most, assuming that you’re starting from a blank spreadsheet.**Prompt Format:**In some cases, you will be provided a brief prompt consisting of a few paragraphs on a fictitious scenario and be asked to build a quick model from scratch – whereas in others, you may be given the confidential information memorandum (“CIM”) of a real acquisition opportunity to put together an investment memo alongside an LBO model to support your thesis. For the latter, the prompt is usually left vague intentionally and it will be asked in the form of a “share your thoughts” open-ended context.

## LBO Model Interview Grading Criteria

Every firm has a slightly different grading rubric for the LBO modeling test, yet at its core, most boil down to two criteria:

**Accuracy:**How well do you understand the underlying mechanics of an LBO model?**Speed:**How quickly can you complete the task without a loss in accuracy?

For more complex case studies, where you will be given more than three hours, your ability to interpret the output of the model and make an informed investment recommendation will be just as important as your model flowing correctly with the right linkages.

^{In-Person LBO Modeling Test Spectrum}

Thanks for this post – it is very useful! A question on the calculation of IRR and MOIC, what did you do to make the functions applied to all the cells on the right and give out correct answer? i tried to use apply the formulas to the right use… Read more »

Hi,

In Step 3. could you please explain why amortization of financing fees is included as part of net income but mandatory amortization of term loan isn’t? Shouldn’t net income include all debt related repayments? Thanks.

How long should it take to build this model from scratch (blank excel) and complete the exercise? thanks

Hi. If in a CFDF txn, the minimum cash stays on the balance sheet and is not taken by the seller, why do we need to show it in the Uses ? Doesnt showing the min cash in the uses imply that the buyer will fund the min cash using… Read more »

Hello, just two questions regarding the IRR. 1) What do we calculate FCF (post revolver) if at the end we use a multiple of EBITDA and exit value for the calculation of IRR? 2) In the table above IRR increases as the exit years get delayed. I’ve seen some models… Read more »

Hi, For the revolver, in this scenario it seems that it is set to draw only if pre-revolver fcf is negative but shouldn’t we need to adjust it to reflect the 5mn in minimum cash each year? I realize that because the CFs are all positive that this doesn’t impact… Read more »

Hi, I was wondering if the formula of the UFCF is missing something.

If we start with NI, isn’t it UFCF = NI + D&A + I (1-t) – CAPEX – Change in NWK?

I don’t see I (1-t) being added back.

Can we also start with NOPAT?

Hi,

For the calculation of unlevered FCF, aren’t we supposed to add back interest expense x (1-t) ?

Unlevered FCF = Net income + depreciation and amortization + interest expense (1-t) – capital expenditures – change in net working capitalWhy didn’t we add the $50mm under “$ amount” for revolver in “Debt Assumptions”? Why are we just including it in the debt schedule?

Hi, how would you account for the transaction fee in the final returns calculation?

Thanks a lot for your help and great tutorial!

Hi, in case I have a lot of unused cash and no debt to pay off before the purchase, can I use it as a source of funding? If so, how can I add this step to the model?

Thanks a lot!

D.

Hi, in the FCF pre revolver, why do we subtract “mandatory amortization? Is it a real cash out flow?

Why are we adding back the amortization of financing fees? I understand that it’s a form of amortization, but it seems to me that it’s a cash expense?

In step 3 there is already interest expense, how is that possible?

because it is stated that for a while we leave it as a blank