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Which variables have the greatest impact on LBO returns?
Answer
(1) Entry multiple (purchase price) — every turn cheaper is a multi-percentage-point IRR pickup. (2) Exit multiple — multiple expansion or compression. (3) Leverage/debt used — higher leverage amplifies equity returns (but adds risk). Secondary drivers: EBITDA growth, FCF conversion, and hold period.
Why interviewers ask this
Entry multiple matters most because it's the only lever you fully control. Exit multiple is market-dependent. EBITDA growth is operationally driven and somewhat under management's control. The three combine to drive total return.
LBO driverssensitivity