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A simple leveraged buyout of a European services company
You run the case. Read the prompt, answer questions from the notes below, and share data only when the candidate asks for it or gets stuck. Score at the end.
Case timer
00:00
1. Read the prompt aloud
Read it slowly, then pause. Let the candidate ask questions before they structure.
A PE fund buys a business services company in Europe with EBITDA of EUR 100 million, paying 10 times EBITDA. It funds the deal with EUR 500 million of debt and the rest in equity. Over 5 years EBITDA grows to EUR 130 million and the company uses its cash to repay EUR 200 million of debt. The fund sells at the same 10 times multiple. What are the MOIC and roughly the IRR, and where did the return come from?
2. Answers to clarifying questions
This case has no scripted clarifying answers. Answer from the prompt, and say "assume what you think is reasonable" if the prompt does not cover it.
3. A model structure
Compare the candidate's structure with this one. A different split can be just as good if it is clean and fits the problem.
- Equity value at exit versus equity invested
- Entry: EV = EBITDA x multiple; equity = EV minus debt
- Exit: EV = new EBITDA x exit multiple; equity = EV minus remaining debt
- Return sources: EBITDA growth, multiple change, debt paydown
4. The working, step by step
Each step shows how a strong candidate works it out. Share a new fact from it only when the candidate asks or is stuck, and let them do the math: the result in the dark box is what they should reach.
Step 1: Entry value
What a strong candidate does: 10 times EUR 100 million.
Entry EV (EUR millions): 100 × 10 = 1,000
Step 2: Equity invested
What a strong candidate does: EV minus EUR 500 million of debt.
Equity at entry (EUR millions): 1,000 - 500 = 500
Step 3: Exit value
What a strong candidate does: 10 times EUR 130 million.
Exit EV (EUR millions): 130 × 10 = 1,300
Step 4: Equity at exit
What a strong candidate does: Debt is now 500 minus 200, which is 300.
Equity at exit (EUR millions): 1,300 - (500 - 200) = 1,000
Step 5: MOIC
What a strong candidate does: Equity out divided by equity in.
MOIC (times): 1,000 ÷ 500 = 2
Step 6: IRR check
What a strong candidate does: An IRR of about 14.87 percent grows money 2 times in 5 years: 1.1487 to the power of 5 is about 2.
Growth factor over 5 years at 14.87 percent: 1.1487 × 1.1487 × 1.1487 × 1.1487 × 1.1487 = 2
Step 7: Return from EBITDA growth
What a strong candidate does: EBITDA rose 30 at a multiple of 10.
Value from EBITDA growth (EUR millions): (130 - 100) × 10 = 300
Step 8: Bridge ties out
What a strong candidate does: EBITDA growth 300, multiple change 0, debt paydown 200: together the 500 gain in equity.
Total equity gain (EUR millions): 300 + 0 + 200 = 500
The recommendation to listen for
At the end, say: "The CEO walks in. What is your recommendation?"
The fund should do the deal but build its plan on EBITDA growth, because it doubles its money, a 2.0 times MOIC, for an IRR of about 15 percent over 5 years. First, three fifths of the EUR 500 million gain comes from growing EBITDA from EUR 100 million to EUR 130 million, worth EUR 300 million at 10 times. Second, the other two fifths comes from repaying EUR 200 million of debt; none comes from a higher multiple. The risk is a lower exit multiple: at 8 times, MOIC falls to about 1.5. As a next step, test each EBITDA growth assumption in the plan.
Risks a strong answer names: If the exit multiple falls from 10 to 8 times, exit EV is 1,040 and equity is 740, a MOIC of only about 1.5 times; High debt makes the company fragile if earnings drop; Interest costs reduce the cash available to repay debt.
Score the candidate
Score each criterion from 1 to 5. A 2 or a 4 sits between the descriptions.
This case has no exhibit. Score Exhibit reading on how the candidate used the data you gave them: did they pick out the number that matters and say what it means?
Total
0 out of 25
Score all five criteria to see the band and the feedback template.