## What is an LBO Model Test?

The **LBO Model Test** refers to a common interview exercise given to prospective candidates during the private equity recruiting process.

Usually, the interviewee will receive a “prompt,” which contains a description containing a situational overview and certain financial data for a hypothetical company contemplating a leveraged buyout.

Upon receipt of the prompt, the candidate will build an LBO model using the assumptions provided to calculate the return metrics, i.e. the internal rate of return (IRR) and the multiple on invested capital (“MOIC”).

## Basic LBO Model Test: Practice Tutorial Guide

The following LBO model test is an appropriate place to start to ensure you understand the modeling mechanics, particularly for those starting to prepare for private equity interviews.

But for investment banking analysts interviewing for PE, expect more challenging LBO modeling tests like our standard LBO modeling test or even an advanced LBO modeling test.

The format for the basic LBO model is as follows.

**Excel Usage:**Unlike the paper LBO, which is a pen-and-paper exercise given in earlier stages of the PE recruiting process, in an LBO Modeling Test, candidates are given access to Excel and expected to construct an operating and cash flow forecast, financing sources & uses and ultimately determine the implied investment returns and other key metrics based on the information provided in the prompt.**Time Limit:**The various LBO Excel modeling tests you encounter throughout the recruitment process will most commonly be either 30 minutes, 1 hour or 3 hours, depending on the firm and how near you are to the final stage before offers are made. The one covered in this post should take approximately one hour at most, assuming that you’re starting from a blank spreadsheet.**Prompt Format:**In some cases, you will be provided a brief prompt consisting of a few paragraphs on a fictitious scenario and be asked to build a quick model from scratch – whereas, in others, you may be given the confidential information memorandum (CIM) of a real acquisition opportunity to put together an investment memo alongside an LBO model to support your thesis. For the latter, the prompt is usually left vague intentionally, and asked in the form of a “share your thoughts” open-ended context.

## LBO Modeling Test Interview Grading Criteria

Every firm has a slightly different grading rubric for the LBO modeling test, yet at its core, most boil down to two criteria:

**Accuracy:**How well do you understand the underlying mechanics of an LBO model?**Speed:**How quickly can you complete the task without a loss in accuracy?

For more complex case studies, where you will be given more than three hours, your ability to interpret the output of the model and make an informed investment recommendation will be just as important as your model flowing correctly with the right linkages.

^{In-Person LBO Modeling Test Spectrum}