The LBO and the paper LBO
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
4 min read · updated June 29, 2026
A leveraged buyout is exactly what it sounds like: a private equity firm buys a company using mostly borrowed money, then uses the company's own cash flow to pay that debt down. The sponsor puts in a thin slice of equity, the company carries the rest as debt, and over a five-year hold the debt shrinks while (hopefully) the business grows. Sell at the end, and the equity that's left is the prize.
Reason from the sponsor's seat. They don't care about EPS or accounting niceties. They care about one thing: how much cash do I get back versus how much I put in, and how fast? Everything in an LBO serves that return.
Sources and uses
Every LBO starts here. Uses is what you have to pay for (the purchase price plus fees). Sources is where the money comes from (debt plus the sponsor's equity). They must equal, and the equity check is just the plug.
Buy a company for $1,000, fund $600 with debt, and the sponsor writes a $400 equity check. That's the entire setup: more debt means a smaller check today, and a bigger return multiple if it works.
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Frequently asked
- What is a leveraged buyout?
- A leveraged buyout is when a private equity firm buys a company using mostly borrowed money, then uses the company's own cash flow to pay that debt down. The sponsor puts in a thin slice of equity, the company carries the rest as debt, and over a five-year hold the debt shrinks while the business hopefully grows.
- Why does leverage juice returns in an LBO?
- Debt is cheaper than equity and the lenders do not share in the upside. They take fixed interest and their principal back, and everything above that flows to the equity. So the more of the purchase funded with debt, the more concentrated the gains on the sponsor's small slice. The downside is amplified the same way.
- How do you run a paper LBO?
- Buy a company with 100 of EBITDA at a 10x multiple for a 1,000 price, funded with 600 debt and 400 equity. Grow EBITDA to 150 over five years, sweep debt from 600 to 300, then exit at 10x for 1,500 enterprise value. Subtract 300 debt for 1,200 equity, a 3.0x MOIC.
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