Case 006LBOCore
Over the phone, with no pen: a sponsor buys a textile maker at 7.0x, grows EBITDA, repays debt from cash and exits at only 6.0x. Roughly what are the money multiple and the IRR?
1The situation
A sponsor buys Ruvani Textiles, a yarn and fabric maker, for 7.0x its EBITDA of Rs 50 crore, so Rs 350 crore. It borrows Rs 200 crore at 10% and puts in Rs 150 crore of equity. EBITDA rises by Rs 4 crore a year to Rs 70 crore in year 5.
Depreciation equals capex at Rs 10 crore a year, working capital does not move, tax is 25%, interest is charged on the opening balance and every rupee of free cash flow repays debt. The sponsor sells at the end of year 5, but textile multiples have fallen and the exit is at 6.0x.
2Your task
You have no pen and no spreadsheet. Talk the interviewer through the money multiple and the IRR in round numbers, and say where the return comes from.
Quick check
Before any maths: the exit multiple falls a full turn. What happens to the sponsor's money?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About 2.4x the money and an IRR of about 19%. Exit EBITDA of Rs 70 crore at 6.0x is Rs 420 crore. Five years of cash repay about Rs 137 crore of the Rs 200 crore debt, leaving about Rs 63 crore, so equity is worth about Rs 357 crore against Rs 150 crore in. Growth and debt paydown together outrun the one-turn fall in the multiple.
Step 1How do you set this up when you cannot write anything down?
Say the structure out loud before any arithmetic, so the interviewer hears a plan: entry, cash generation, exit, then return. On the phone, keep only three running numbers in your head: debt at entry, debt at exit, and exit enterprise value. Everything else is a step towards one of them. It is like working out what a flat will sell for after five years of paying down a home loan: you need the sale price and what is left on the loan, not every monthly instalment.
Entry is easy: Rs 350 crore of price, Rs 200 crore of debt, Rs 150 crore of equity, so debt is 4.0x EBITDA. Exit value is also easy: Rs 70 crore at 6.0x is Rs 420 crore. The only hard part is how much debt is left, and that needs a shortcut.
Step 2How much debt does five years of cash repay, without a table?
Because depreciation equals capex and working capital is flat, free cash flow each year is simply net income, and all of it repays debt. Work out the first and last years and average them. Year 1: EBITDA 54, less 10 of depreciation and 20 of interest, is 24 before tax, 18 after. Year 5: EBITDA 70, less 10 and roughly 10 of interest on the smaller loan, is about 50 before tax, 37.5 after. The average is about 27.5, so five years repay roughly Rs 137 crore. The full table agrees: Rs 136.9 crore, leaving Rs 63.1 crore of debt.
| Year | EBITDA | Interest at 10% | Tax at 25% | Net income = debt repaid | Debt at year end |
|---|---|---|---|---|---|
| 1 | 54.0 | 20.0 | 6.0 | 18.0 | 182.0 |
| 2 | 58.0 | 18.2 | 7.5 | 22.4 | 159.7 |
| 3 | 62.0 | 16.0 | 9.0 | 27.0 | 132.6 |
| 4 | 66.0 | 13.3 | 10.7 | 32.1 | 100.6 |
| 5 | 70.0 | 10.1 | 12.5 | 37.5 | 63.1 |
| Total | 136.9 | 63.1 |
Step 3Where does the return come from, and which engine works against you?
Split the change in equity into its three engines, because the follow-up is always which one mattered. EBITDA growth of Rs 20 crore at the 7.0x entry multiple adds Rs 140 crore; the fall to 6.0x on Rs 70 crore of EBITDA takes away Rs 70 crore; debt paydown adds Rs 137 crore. The multiple contractionSelling at a lower EV/EBITDA multiple than you bought at, which removes value even when the business itself has grown. is real, but growth and paydown together are almost four times its size.
| 420 | exit enterprise value, 6.0x EBITDA of Rs 70 crore |
| 63.1 | debt left after five years of repayment |
| 150 | equity put in at entry |
Step 4How do you turn 2.4x into an IRR in your head?
Carry three anchors for a five-year hold: 2.0x is about 15% a year, 2.5x about 20%, 3.0x about 25%. 2.38x sits just under 2.5x, so say 'a little under 20%, call it 19%', and say that you are interpolating. The exact figure is 18.9%. Then add the one sentence that shows judgement: had the multiple held at 7.0x, equity would be about Rs 427 crore, 2.85x and about 23%, so the multiple fall cost roughly four points of IRR.
Where candidates lose it
The usual loss is panicking at the lower exit multiple and assuming the deal fails. Candidates who start with the multiple never get to the two engines that carry the return, and an interviewer on the phone hears the hesitation.
The second is losing track of interest. Using Rs 20 crore of interest every year ignores that the loan shrinks, understates cash flow by about Rs 17 crore over five years and pushes the answer a point too low.
What the interviewer asks next
- What exit multiple would make the IRR exactly 15%?
- If the sponsor paid a Rs 50 crore dividend recap in year 3, what happens to MOIC and IRR?
- Would you rather have Rs 5 crore more EBITDA growth or a 0.5x higher exit multiple?
- How does the answer change if half the debt were a bullet note?
Asked at Truist Securities, Investment Banking, Chicago, 2026 (Wall Street Oasis): Paper LBO over the phone
Company names and figures are illustrative.