The prompt
A private equity firm buys a company with $50 million of EBITDA at 10.0x EBITDA. It finances the deal with 5.0x EBITDA of debt and the rest in equity. EBITDA grows to $70 million by year 5. The company generates about $30 million of free cash flow a year after interest, taxes and capex, all used to repay debt. The firm exits at the end of year 5 at 10.0x EBITDA. Ignore fees and assume no cash on the balance sheet. What are the MOIC and IRR?
Step 1: Purchase price and financing
Enterprise value is EBITDA times the entry multiple: $50m × 10.0x = $500m. Debt is 5.0x EBITDA: $50m × 5.0x = $250m. The sponsor's equity is the rest: $500m − $250m = $250m.
| Sources | $m | Uses | $m |
|---|---|---|---|
| Debt (5.0x) | 250 | Purchase enterprise value | 500 |
| Sponsor equity | 250 | ||
| Total | 500 | Total | 500 |
Step 2: Debt paydown
The company produces about $30m of free cash flow a year for five years: $30m × 5 = $150m of debt repaid. Debt at exit is $250m − $150m = $100m.
In a real paper LBO you may need to estimate free cash flow yourself from revenue, margins, interest, taxes and capex. Write each line down and round aggressively. Interviewers care about the logic, not the decimals.
Step 3: Exit value and equity
Exit enterprise value is year-5 EBITDA times the exit multiple: $70m × 10.0x = $700m. Subtract the remaining debt to get the sponsor's equity: $700m − $100m = $600m.
Step 4: MOIC
MOIC is equity out divided by equity in: $600m ÷ $250m = 2.4x.
Step 5: IRR without a calculator
You won't be expected to calculate 2.41/5 by hand. Use these benchmarks for a five-year hold instead:
| MOIC over 5 years | Approximate IRR |
|---|---|
| 1.5x | ~8% |
| 2.0x | ~15% |
| 2.5x | ~20% |
| 3.0x | ~25% |
2.4x falls just below 2.5x, so the IRR is a little under 20%: about 19%. (The exact answer is 19.1%.) Saying “just under 20%, because 2.5x over five years is about 20%” shows the interviewer exactly how you think.
Step 6: Explain where the return came from
Strong candidates finish by breaking the $350m equity gain ($600m − $250m) into its drivers:
- EBITDA growth: ($70m − $50m) × 10.0x = $200m
- Multiple expansion: bought and sold at 10.0x, so $0
- Debt paydown: $250m − $100m = $150m
$200m + $0 + $150m = $350m. It ties out, and it tells a story: most of the return came from growing the business, and the rest from using its cash to repay debt.
Tips for the real thing
- Write a mini sources and uses first. It anchors everything else.
- Keep units consistent. Stay in millions and round to whole numbers.
- Talk while you work. Silence makes interviewers nervous; narration earns partial credit.
- Sanity-check your answer. A 60% IRR on a mature business at 10x probably means you forgot to subtract debt.
- Expect a twist. “What if you exit at 9x?” Redo step 3 only: $630m − $100m = $530m equity, 2.1x MOIC, about 16% IRR.
Practice until it's automatic
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