Project Brentwold — 45-Minute Basic LBO
A 45-minute Basic LBO Modeling Test case study with a complete model answer
Modeled After
Warburg Pincus
Warburg Pincus's basic LBO modeling test as candidates rebuild it against the clock: a capitalization built from a current share price and a stated premium, a sources and uses in which sponsor equity is the plug and the target's own cash is a source, and a debt structure quoted in turns of EBITDA against a per-tranche rate behind an explicit circularity switch.
The capitalization convention and the sources-and-uses discipline are modeled after Warburg Pincus. The cash sweep above minimum cash, the management option pool, the treasury stock method share count and both sensitivity grids are our own additions at this tier, and the company, the plan, the capital structure and every figure in this case are entirely our own.
The Situation
Brentwold Diagnostics Corporation is a listed clinical laboratory. It runs routine and specialty diagnostic testing for hospital systems, physician groups and health plans across the Mid-Atlantic and the Southeast, out of four core laboratories and a network of patient service centers.
Brentwold Diagnostics Corporation
- Sector
- Healthcare services — clinical laboratory; routine and specialty diagnostic testing for hospital systems, physician groups and health plans
- Size
- Geography
- United States; the Mid-Atlantic and the Southeast
- Ownership
- Situation
The Prompt
You are an associate candidate in a second-round private equity interview. A laptop is placed in front of you with a partially built workbook open, and the proctor says:
"Here is the plan, here is the term sheet the arranger has given us, and here is a template.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
Modeling test instructions (material-1.pdf)
Management plan and financing term sheet (material-2.pdf)
Raw plan extract (data-1.xlsx)
Blank template (template.xlsx)
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 45 minutes.
PART 1
Sources and uses, with sponsor equity as the plug
PART 2
The operating model, revenue down to net income
PART 3
Free cash flow, down to cash available for optional repayment
PART 4
The debt schedule, with the sweep the term sheet describes
PART 5
Exit, the management option pool, and the returns
PART 6
Returns attribution — where the return came from
PART 7
Two sensitivity grids — and the one that has to be re-run
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished Excel model is in the solution set below.
- 0:00 – 0:03
read the Assumptions tab, do not type in it
- 0:03 – 0:09
sources and uses
- 0:09 – 0:13
the operating model
- 0:13 – 0:17
cash flow
- 0:17 – 0:24
the debt schedule
- 0:24 – 0:29
exit and returns
- 0:29 – 0:33
attribution
- 0:33 – 0:45
the two grids, and the sentence at the end
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
What the basic tier includes, and what it leaves out
This tier runs revenue down to levered free cash flow, then a real debt schedule, then returns. It has no balance sheet and no cash flow statement — and therefore no purchase price allocation, no goodwill, no asset write-up, no deferred tax liability, no capitalized financing fee and no fee amortization. All of those are real, and knowing which way each one would move the answer is worth more than naming them. Two of them move it nowhere at all: the write-up raises book depreciation and amortization, the deferred tax liability unwinds against it, and both are reversed on a cash flow statement this tier does not have — cash flow, net debt at exit and the return are unchanged. The financing fee moves it the other way from what candidates assume: capitalizing it and amortizing it buys a deduction over the life of the borrowing that expensing the whole amount at close gives up, so its absence here flatters nothing and costs a few basis points. Knowing what is absent is as much a part of the archetype as knowing what is present, and a candidate who starts building a balance sheet has misread the exercise rather than exceeded it.
The treasury stock method at an offer price
When the offer is a premium to a traded price, the share count is not the basic count. Options struck below the offer are all in the money, so all of them are exercised, and the cash management pays in buys shares back — at the offer price, because that is what the shares cost on the day. Ignoring the options entirely gives you a share count that is exactly the round number on the cover of the 10-K, which is the tell: nobody's fully diluted share count is a round number. The error is worth real money before it reaches anything else in the model, and it flatters the return in both directions at once — a lower price paid and a smaller equity check.
Sponsor equity as the plug, and the target's own cash as a source
Sources and uses is not a valuation exercise; it is an identity. Uses are fixed by the price and the structure, the debt is fixed by the term sheet, and the sponsor's equity is the residual that makes the two columns agree. The line most often dropped is the target's own cash, which is a SOURCE: the buyer acquires it along with everything else and can use it to fund the purchase. Leave it out and the entire balance lands on the sponsor's check. That error is the only one in this case that makes the deal look WORSE, which means a candidate who makes it can reach the right answer for the wrong reason — and getting the answer right off a broken model is not getting it right.
Interest on beginning-of-period balances
Compute interest on the balance at the start of the year and the model has no circularity: interest in a year depends only on balances set at the end of the year before, so nothing refers to itself. Average-balance interest is more precise and is the convention many practice workbooks use, behind an iterative-calculation switch. At this tier the beginning-balance convention is the right trade — it removes the circularity by construction rather than iterating through it, which is what makes every check row in the file trustworthy. If you find yourself reaching for iterative calculation here, you have wired something wrong rather than merely difficult. Say the convention out loud; the choice being yours and stated is worth more than the precision it costs.
A cash sweep bounded at both ends
A sweep needs a floor and a cap, and both matter. The floor is zero, because with no revolver in the structure there is nowhere for a negative sweep to draw from — a sweep that can go negative is borrowing from nothing. The cap is the balance that survives mandatory amortization, because a tranche cannot be repaid below zero; a model without the cap drives a tranche negative and then cheerfully keeps accruing interest on a negative balance. And the cap binds here: in the year the first tranche is retired, the pool exceeds what is left of it, and what the cap leaves over has to cascade to the next tranche rather than evaporate.
Sweep priority is documentation, not optimization
The order in which a sweep hits the tranches is set by the credit agreement, not by the borrower's preference. Here the term sheet sends it to the cheaper of the two tranches first, which is not what a borrower would choose, and that is why the priority is a documented column rather than a judgment call. As the cheaper paper is retired, the blended cost of debt RISES across the hold even though neither tranche's rate moves at all. Build the sweep so the term sheet decides where the money goes, and the answer to 'why does your blended rate go up?' is already in the file.
Working capital on the increment, not the level
The plan gives working capital as a percentage of the INCREASE in revenue. Driving it off the level of revenue instead is the single most common way to get this line wrong by an order of magnitude, and the model still runs — it just consumes an enormous amount of cash every year and starves the sweep. The tie-out at the bottom of the debt schedule is what catches it: cumulative levered free cash flow has to equal the reduction in net debt from close to exit, and when it does not, this line and the sign on capital expenditure are the first two places to look.
The management option pool, and the order of its two effects
A post-close option pool does two things and they are not symmetric. Management pays a strike price IN, which adds to the equity pool before it is divided; and management takes a share OUT, which is deducted after the division. Do both in the right order and the cost to the sponsor is the share taken out less the strike paid in — a smaller number than the gross dilution by exactly what management paid. Ignore the pool entirely and the return improves, because five percent of the equity has been handed back to the sponsor. Take the dilution but forget the proceeds and the return worsens, because management has been charged for its shares and never credited with paying for them. Three candidates, three different answers, and only one of them has read the waterfall.
Earnings quality behind the multiple
Any valuation running off an earnings multiple has to say what is in the earnings. Two questions do the work here. First, is stock-based compensation charged or added back? It is charged in this case, which means every multiple and every leverage figure is struck on a post-SBC base — the conservative choice, and the flattering alternative is available to anyone who wants to quote it. Second, is each add-back something that has happened or something forecast to happen? A public-company cost eliminated on a take-private is forward-looking: the cost is real today and the saving depends on the buyer actually removing it. Strike it out and both the multiple you are paying and the leverage you are running go up. Where the whole basket sits inside the customary twenty-five percent cap a credit agreement applies, it is a disclosure point rather than a covenant point — but it is still a point, and it costs four seconds to make.
Returns attribution
Total gain decomposes into growth in earnings, expansion in the exit multiple, and deleveraging — plus, in a structure with a pool, what leaks to management. Growth is the change in Adjusted EBITDA capitalized at the ENTRY multiple; multiple expansion is the change in multiple applied to EXIT-year earnings; the remainder is the change in net debt. When the exit multiple is held equal to entry, the multiple-expansion term is exactly zero by construction, and saying that out loud is the point: none of the return depends on the market re-rating the asset. The more interesting reading is the split between the other two. A return that leans heavily on earnings growth rather than on deleveraging is telling you the capital structure is not carrying enough of the load relative to the price being paid, and no amount of operating performance inside the plan fixes a price problem.
Price discipline — from a readout to a number you would pay
'What is the IRR?' and 'what would you pay?' are different questions with different answers, and this case asks the second one explicitly. Holding the exit multiple at entry, the plan at the management case and the debt quantum fixed at the term sheet, solve for the highest premium that still returns the hurdle. That converts a readout into a negotiating position — and sometimes into a finding, because a premium that clears the hurdle can be so far below the one on the table that the gap is not a negotiating range at all. The alternative framing runs off the other grid: at the price on offer, how fast does revenue have to grow to reach the hurdle, and is that the plan management has underwritten or a different company?
Which sensitivity axis moves the debt schedule
This is the judgment inside the grids and it decides how you build them. An exit-multiple axis and a premium axis change what you pay and what you sell for; neither changes the cash the business generates, and the debt is committed in dollars, so exit-year earnings and net debt at exit are the base case's in every cell. A revenue-growth axis is different: faster growth generates more cash, more cash goes into the sweep, and net debt at exit moves — so every row is a full five-year re-run rather than a scaling of the base case. Build the second grid off the exit line alone and every cell in it is wrong in a way that is invisible on the page.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: Excel model, built the way a banker would actually build it. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Offer off a premium to an unaffected share price
- —Treasury stock method diluted share count
- —Sources and uses with sponsor equity as the plug
- —Two-tranche debt schedule on beginning-of-period balances
- —Cash sweep floored, capped and cascading in documented priority
- —Management option pool — strike proceeds in, dilution out
- —Returns attribution including leakage to management
- —Two two-dimensional sensitivity grids, one of which re-runs the model
- —Ability to pay, and a verbal recommendation
Memo
The written recommendation and how it was reached
Upgrade to Diamond
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Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Brentwold — 45-Minute Basic LBO
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Is forty-five minutes really enough to build a debt schedule with a sweep, an option pool and two grids?
It is, if the structure is already familiar — which is what the format is testing. The template hands over every label, column header, number format and print setting, plus the whole term sheet, the whole management plan, the earnings-quality reconciliation and all three sensitivity axes, so nothing is spent on layout or on typing inputs. The measured workload is 638 cells and 165 distinct formulas, because almost every row is written once in the first projected column and filled right, and the sensitivity rows are written once and copied down. That is about 16 seconds a formula. Both numbers are measured from the file rather than estimated, and both are printed on the template Cover so neither can be presented as the whole story.
Why is there no balance sheet and no cash flow statement?
Because a forty-five-minute exercise that builds either one never reaches the returns, and the returns are the point. This tier runs from revenue to levered free cash flow to the debt schedule to the exit. That scope constraint is the definition of the archetype, not a shortcut — and it is why the case has no purchase price allocation, no goodwill, no deferred tax liability and no capitalized financing fees. If you find yourself laying out a balance sheet, you have started a two-hour exercise inside a forty-five-minute one.
But there is a revenue line — why, if the tier below has none?
Because one of the two sensitivity grids sweeps revenue growth, and a growth axis with nothing to grow is meaningless. That is the whole reason the revenue line exists here. It also changes how the operating build works: the margin ramps as volume covers a fixed laboratory footprint, so Adjusted EBITDA is a margin on a revenue line rather than a plan input handed to you at the EBITDA level.
Should interest be on average or beginning balances?
Beginning, in this exercise, and the instruction sheet says so. Average-balance interest is more precise and is common in practice, but it makes the model circular and requires iterative calculation to resolve. Beginning balances remove the circularity by construction, which is why every check row in the file can be trusted and why there is no circularity toggle anywhere in the workbook. If you are used to building it the other way, say so out loud and say what the convention costs — knowing why a simplification exists is worth more than the simplification itself.
What is the sweep actually allowed to take?
Levered free cash flow after mandatory amortization, plus any cash above the operating minimum. Then it is floored at zero and capped at the balance left after mandatory amortization on the tranche it is hitting, and whatever the cap leaves over cascades to the next tranche in the documented order. The floor matters more here than in most structures because there is no revolver at all: with nowhere to draw from, a sweep that could go negative would be borrowing from nothing.
How should I handle the management option pool?
As a waterfall with two steps in a specific order. Strike proceeds are paid IN and increase the pool before it is divided; management's percentage is then taken OUT of the divided pool. The strike is set at the sponsor's own entry price per unit, so management is buying in at the price the sponsor paid rather than at anything struck at exit. Doing one step and not the other is worse than doing neither, because it produces a confidently wrong number in a direction you cannot explain.
Do I use the IRR function?
No. There is a single equity outflow at close and a single inflow at exit, so the return is the multiple of money raised to the power of one over the hold period, less one. Neither IRR nor XIRR appears anywhere in the model or the template. It is also the safer habit under a clock: a closed form cannot pick up an extra cell unnoticed, and it is far easier to sanity-check in your head. The market's own rule of thumb is worth carrying — a multiple of money above 6.0x over five years implies a return above 40% and almost always means an arithmetic error.
How much does formatting actually matter?
It is explicitly graded here, as it is on real modeling tests. Blue for a hardcoded input, black for a formula on the same tab, green for a pure link to another tab. A hardcoded number buried inside a formula is marked down even when the number is right, because the next person to open the file cannot see it. Build one related habit before you sit the test: pin every reference to a single-cell assumption with dollar signs. An unpinned scalar cannot be filled right at all — dragging it across four columns walks onto empty cells — so a model that fails this does not merely look untidy, it has to be retyped five times.
What if I run out of time?
Cut the grids, and cut the second one first. Do not cut the check rows, do not cut the option pool and do not cut the returns attribution. The clock printed on the template puts the grids last because they are where the marks are thinnest per cell, and it puts the option pool inside the returns allocation because that is the block a candidate drops without noticing. A model that ties, with an attribution bridge and two sentences about which source of value dominates, is a better answer than a full set of grids sitting on top of a return nobody can explain.
What is the interviewer's most likely follow-up?
Some form of 'what would you pay?' or 'what would have to be true?'. The first is answered by holding the return at the hurdle and solving back for the premium, which is why the case asks for a price rather than a number. The second is answered from the attribution bridge and the growth grid together: name the source of value that dominates, say what has to be true for it to arrive, and say what happens if it does not. A third one to be ready for is about the structure — if the return is short, the honest question is what another turn of leverage would cost and whether this cash flow supports it.
Does this format still come up?
Constantly. It is the standard second-round modeling screen at the forty-five-minute tier across the buyside, and it is where the ladder stops being arithmetic and starts being modeling: the first tier with a real debt schedule, a real sweep and a real option pool. It is cheap to administer, it fits inside an on-site session, and it is very hard to fake — a sweep either respects its floor, its cap and its documented priority or it does not, and thirty seconds of scrolling tells an interviewer which.
About This Basic LBO Modeling Test Case Study
Basic LBO Modeling Test case study for private equity interviews. 45-minute format covering offer off a premium to an unaffected share price, treasury stock method diluted share count, sources and uses with sponsor equity as the plug. Includes the full prompt, a tied-out Excel model and an audio walkthrough.
This case study sits in Private Equity, under LBO Modeling Tests. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
45-Minute Format
The time limit a real assessment would give you
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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