LBO Interview Questions: Everything You Need to Know (2026)
The definitive guide to LBO interview questions for Private Equity. Covers mechanics, returns, paper LBOs, case studies, and 50+ practice questions with model answers.
The Leveraged Buyout (LBO) is the foundation of private equity investing. If you're preparing for PE interviews, mastering LBO concepts isn't optional—it's essential. Interviewers will probe your understanding from multiple angles: mechanics, intuition, and practical application.
This comprehensive guide covers everything you need to know about LBO interview questions. We'll start with fundamentals, build to advanced concepts, and provide 50+ practice questions with model answers.
How to Use This Guide
What is an LBO?
A Leveraged Buyout is the acquisition of a company using significant amounts of borrowed money (debt) to fund the purchase. The assets of the company being acquired, along with those of the acquiring company, are used as collateral.
LBO Key Characteristics
| Term | Definition |
|---|---|
| High leverage | Typically 50-70% of purchase funded by debt |
| Cash flow focus | Target company's cash flows service the debt |
| Value creation | Returns generated through operational improvement and financial engineering |
| Exit orientation | Investment made with a clear exit strategy (typically 3-7 years) |
Walk Me Through an LBO
This is the most common LBO interview question. Here's how to structure your answer:
Deeper Dive: Sources & Uses
The sources and uses table is the foundation of any LBO. It must balance— every dollar of sources must have a corresponding use.
Sources & Uses Framework
Sources = Senior Debt + Subordinated Debt + Sponsor Equity + Rollover EquityUses = Purchase Price + Transaction Fees + Refinancing + Cash to B/SSources must equal Uses. The equity check is typically the 'plug' that balances the table.
The Three Drivers of LBO Returns
Understanding what drives returns is crucial for both structured questions and the intuition tests that follow. Returns in an LBO come from three sources:
1. EBITDA Growth
If EBITDA grows over the hold period, exit value increases proportionally (assuming the same exit multiple). This is often the primary value creation lever.
2. Debt Paydown
As debt is repaid using free cash flow, equity value increases dollar-for-dollar. This is "forced savings"—the company's cash flows reduce the debt, increasing what's left for equity holders at exit.
3. Multiple Expansion
If you can exit at a higher multiple than entry, you get a return boost. This is the least reliable driver—most models assume flat or declining multiples to be conservative.
What Makes a Good LBO Candidate?
This question tests your commercial judgment and understanding of what PE firms look for in targets.
Ideal LBO Candidate Characteristics
| Term | Definition |
|---|---|
| Stable, predictable cash flows | Essential for servicing debt |
| Low capital intensity | Less CapEx means more cash for debt paydown |
| Defensible market position | Sustainable competitive advantages |
| Improvement opportunities | Revenue growth or margin expansion potential |
| Experienced management | Team that can execute the value creation plan |
| Clear exit options | Multiple potential buyers or IPO path |
Paper LBO Questions
Paper LBOs test whether you understand LBO mechanics intuitively. You'll be given basic information and asked to calculate returns mentally or with minimal notes.
Paper LBO Tips
- • Round aggressively—precision isn't the point, intuition is
- • Know the MOIC-to-IRR shortcuts (2x in 5 years ≈ 15%, 3x ≈ 25%)
- • State your assumptions clearly as you go
- • It's okay to ask clarifying questions about debt paydown or CapEx
Sensitivity & Intuition Questions
These questions test whether you truly understand how LBOs work. Interviewers will ask "what happens if..." to probe your intuition.
Technical LBO Questions
Accounting & Cash Flow
Debt & Capital Structure
Approaching LBO Case Studies
Many PE interviews include case studies where you'll analyze a potential LBO target. Here's how to structure your approach:
LBO Case Study Framework
| Term | Definition |
|---|---|
| 1. Assess the target | Industry dynamics, competitive position, growth outlook |
| 2. Evaluate cash flows | EBITDA margins, CapEx needs, working capital |
| 3. Identify value creation levers | Operational improvements, add-ons, growth initiatives |
| 4. Structure the deal | Appropriate leverage levels, equity contribution |
| 5. Model returns | Conservative, base, and upside scenarios |
| 6. Assess risks | What could go wrong? How protected is the downside? |
Advanced LBO Concepts
Dividend Recaps
PIK Interest
Add-on Acquisitions
Common Mistakes to Avoid
LBO Interview Pitfalls
- • Not knowing how the 3 statements link in an LBO context
- • Forgetting about tax shields from interest and depreciation
- • Assuming multiple expansion will drive returns
- • Ignoring working capital and CapEx in cash flow projections
- • Not understanding the difference between MOIC and IRR
- • Being unable to do a quick paper LBO
Additional Practice Questions
Here are more questions to practice. Try answering them before reading our model answers:
- How does working capital affect LBO returns?
- Why might a PE firm use PIK debt instead of cash-pay debt?
- What happens to IRR if EBITDA declines post-acquisition?
- How do you think about valuation in an LBO context?
- What's the difference between enterprise value and equity value in an LBO?
- How do management incentives work in an LBO?
- What is covenant-lite debt and when is it used?
- How would you stress-test an LBO model?
- What's the difference between a platform and add-on acquisition?
- How do you calculate an LBO equity cushion?
Ready to Practice?
Understanding LBO concepts is step one. Building the confidence to perform under pressure requires practice. Our Private Equity track includes 400+ questions covering LBO mechanics, returns, deal analysis, and case studies.
Related Resources
Dive deeper into specific LBO topics with our specialized guides: