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  1. 044Work backwards: EBITDA grows from 100 to 140 over 5 years and the business exits at 9x. Entry debt is 5x EBITDA and 200 of it is repaid by exit. What is the highest entry multiple that still returns 3x the equity?Mental paper LBOsHardNeuberger BermanNew York · 2022

    Try it first

    Where does the maximum entry multiple land?

    Show the worked solution

    About 8.2x. Exit EV is 140 x 9 = 1,260. Debt falls from 500 to 300, so exit equity is 960. A 3x return allows entry equity of 960 / 3 = 320. Add the 500 of entry debt and the most you can pay is an EV of 820, which is 8.2x entry EBITDA. Pay more and the 3x target is missed; fees and costs would lower the ceiling further.

    Why work backwards instead of guessing an entry price?

    If you want to arrive at a wedding by 7 and the drive takes two hours with half an hour of traffic, you leave at 4:30. You fix the end point and walk back. A target multiple fixes the exit equity you need relative to the cheque, so the maximum price is found by running the LBO in reverse: exit value, less exit debt, divided by the target, plus entry debt. Every number you need is in the question.

    Start at the exit and walk back to the most you can pay1,260Exit EV140 x 9300Exit debt500 - 200960Exit equity1,260 - 300320Entry equity960 / 3500Entry debt5 x 100820Max entry EV320 + 500read right to left820 / 100 = 8.2x
    Exit EV of 1,260 less 300 of remaining debt leaves exit equity of 960, which supports entry equity of 320 at a 3x target; adding 500 of entry debt sets the maximum entry EV at 820, or 8.2x EBITDA of 100.
    The relationship
    EV0max=E5×mexit−D5target+D0=1260−3003+500=820EV_{0}^{max} = \frac{E_5 \times m_{exit} - D_5}{\text{target}} + D_0 = \frac{1260 - 300}{3} + 500 = 820
    E_5 x m_exitexit EV, 140 x 9
    D_5debt left at exit, 300
    targetthe money multiple required, 3x
    D_0entry debt, 5 x 100 = 500
    What it says in wordsThe most you can pay is the exit equity divided by the target multiple, plus the debt you borrow at entry.

    What does 8.2x tell the investment committee?

    It is a ceiling, not an offer. Entering at 8.2x and exiting at 9x means the plan relies on a little multiple expansion as well as 40% EBITDA growth and 200 of debt paydown, so the committee will test each of those three. 3x over five years is an IRR of about 25%: 3 to the power one fifth is about 1.246.

    Say the limitations. Transaction fees and financing costs come out of the equity at entry, so the true ceiling on the headline price is lower. A real model would also hold some cash at exit and might pay interest in kind. And if the lenders will not provide 5x at an 8.2x price, the equity cheque grows and the ceiling falls.

    Where candidates lose it

    The common loss is forgetting to add the entry debt back: candidates divide exit equity by 3, get 320, and say 3.2x. That is the equity cheque over EBITDA, not the enterprise multiple.

    The second loss is using entry debt instead of exit debt when computing exit equity, which ignores the 200 repaid and makes the ceiling look lower than it is. Track debt at both ends.

    What the interviewer asks next

    • If the exit multiple is 8x instead of 9x, what is the new ceiling?
    • How much does the ceiling fall if 20 of fees are paid out of the equity at entry?
    • What IRR does 3x in five years imply, and what multiple would 25% need?

    Asked at Neuberger Berman, Private Equity, New York, 2022 (Wall Street Oasis): Interviews 4-5 were very technical again and also included multiple paperback LBOs and other, more advanced technicals.