Project Halverston — 2-Hour Full LBO
A 2-hour Full LBO Modeling Test case study with a complete model answer
Modeled After
Fortress Investment Group
The firm's two-hour LBO modeling exercise — an instruction page plus labeled assumption tabs, recreated from a blank spreadsheet against a stated clock, with a four-tranche capital structure including a PIK strip, financing fees amortized over seven years, unamortized financing fees carried on the balance sheet, management options in the exit waterfall, a credit analysis and a reverse required-return solve; its instruction page flags purchase price accounting as expected work product.
The exercise format, the clock, the tranche structure and the reverse required-return solve are modeled after Fortress Investment Group. The purchase price allocation mechanics, the three-answer cover sheet and the exit-multiple by exit-year returns matrix follow the wider private equity modeling-test convention rather than any one firm's, and the company, the capital structure and every figure in this case are entirely our own.
The Situation
Halverston Flow Controls, Inc. designs and manufactures industrial flow-control equipment — gate and control valves, electric and pneumatic actuators, and flow instrumentation — for municipal water and wastewater utilities and for process industries.
Halverston Flow Controls, Inc.
- Sector
- Industrials — flow-control equipment: gate and control valves, electric and pneumatic actuators, and flow instrumentation, with a large aftermarket attachment
- Size
- Geography
- United States
- Ownership
- Situation
The Prompt
You are a candidate sitting a two-hour proctored modeling test at a private equity firm's offices. A laptop is placed in front of you with a labeled workbook shell open on it, alongside a directions page and an information package.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
Modeling test directions (material-1.pdf)
Information package (material-2.pdf)
Purchase price allocation report and financing term sheet (material-3.pdf)
Data-room extract (data-1.xlsx)
Blank workbook template (template.xlsx)
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
Transaction tab — sources and uses, purchase price allocation, opening balance sheet
PART 2
Income statement — five projected years
PART 3
Balance sheet — five projected years, on working capital days
PART 4
Cash flow statement — operations, investing, financing
PART 5
Debt schedule — five tranches, a two-way revolver, a cascading sweep and the credit statistics
PART 6
Returns tab — exit waterfall, matrix and attribution
PART 7
Cover tab — the three typed answers
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 – 10 min
read the term sheet and the allocation report, do not type
- 10 – 30 min
the transaction tab
- 30 – 50 min
the income statement, down to EBIT
- 50 – 75 min
the debt schedule
- 75 – 90 min
link interest back, then the cash flow statement
- 90 – 105 min
the balance sheet, and make it close
- 105 – 120 min
returns, the matrix, and the three answers
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Purchase accounting, and why goodwill has to print twice
Goodwill is the residual after the purchase price is allocated to the fair value of what was acquired: book equity comes off, existing goodwill and existing intangibles are written off, identified intangibles and any asset step-up are recognized, and the deferred tax on the non-deductible write-ups is added back into the residual. Build it as a purchase-premium waterfall and then again as price less net identifiable assets acquired, and put a check between them. Two independent routes to the same number is the only cheap proof that either one is right.
A deferred tax liability on non-deductible write-ups
In a stock purchase with carryover tax basis and no election, the write-ups are book-only. Book depreciation and amortization rise; the tax deduction does not. That difference creates a deferred tax liability at close and then unwinds by the tax rate times the annual write-up charge every year, which is why cash taxes exceed book taxes by exactly that amount and why the release is a deduction on the cash flow statement. A model whose deferred tax liability sits flat has parked the number rather than modeled it, and the unwind line is the tell an experienced reader looks for first.
A larger write-up does not improve returns
Recognizing more intangible value raises book depreciation and amortization, which lowers book net income — and that is exactly offset when the non-cash charge is added back on the cash flow statement and the deferred tax released. Cash flow is unchanged, net debt at exit is unchanged, exit equity value is unchanged and the return is unchanged. The write-up moves the income statement, not the deal. Knowing which accounting entries have cash consequences and which do not is most of what purchase accounting is testing.
Transaction expenses are expensed; financing fees are capitalized
Acquisition-related costs — advisory, legal, accounting — are expensed as incurred and reduce opening equity. Debt issuance costs and original issue discount are capitalized as deferred cost and amortize into interest expense over the life of the borrowing. Sweeping the transaction expenses into goodwill is seductive because the balance sheet still closes and no check row complains, which is why it is a common error and a graded one.
Original issue discount: fund the uses with proceeds, not face
A tranche issued below par raises less cash than its face value. Interest, amortization and repayment all run off the face amount, but only the net proceeds are available to fund the uses, and the discount capitalizes and amortizes into interest expense over the tenor. Size sources off face and the sources column overstates the cash raised, the equity plug is understated by the discount, and the opening balance sheet does not close. It is a small number that breaks a large tab.
A floored base rate binds when the curve falls through it
Floating tranches price off a base rate subject to a floor, and a forward curve that declines through the projection will cross that floor. Wire the curve straight into the pricing formulas and the back years of the model are under-costed on every floating tranche at once. Build one effective base rate row as the greater of the curve and the floor, point everything at it, and the mechanic is visible to whoever opens the file next instead of being implied by five separate formulas.
A two-way revolver
A revolving credit facility repays when there is spare cash and draws when there is not. Most candidates write a sweep that can only repay, because in most practice models cash flow before debt service is comfortably positive in every year and the difference never shows. Here it does: there is a year in which the growth capital expenditure program and a full year of mandatory amortization land together and operating cash flow does not cover them. A one-way model produces no error value, holds a cash balance below the stated minimum, and is wrong. Check the cash line, not the return.
A cascading sweep in documented priority order
Optional prepayment goes to tranches in the order the credit agreement says, and only to tranches it is allowed to reach — notes and mezzanine with call protection are not swept. Write the sweep once with a priority cascade and let the term sheet decide where the money goes; write bespoke formulas per tranche and you have hard-coded a reading of the documentation somewhere nobody can see it. Getting the order wrong changes the balances and the interest bill in every subsequent year, because the tranches carry different coupons.
In-kind interest is a balance that grows
A tranche paying part of its coupon in kind accrues on its beginning balance, capitalizes at year end, and is the one instrument in the structure whose principal rises over the hold. It is an expense on the income statement, an add-back on the cash flow statement, and an increase in the debt schedule — three places, one number, and a candidate who books only two of them will not balance. It also means the exit bridge has to use the grown balance, not the amount issued.
Working capital days that do not match the last actual balance sheet
Days handed to you on an assumptions tab and days implied by the last audited balance sheet are two different things, and they frequently disagree. When the plan's days are tighter than the actuals, the first projected year books a one-time working capital release from collecting faster, holding less inventory and paying suppliers later. Compute the implied days off the actual balance sheet before you use the given ones, and if they differ, say so and ask whether stretching payables is a plan or a hope. A candidate who does not check has underwritten a benefit they never priced.
Interest on beginning-of-period balances
Compute interest on the balance at the start of the year and the model has no circularity: interest depends only on balances set at the end of the prior year, so nothing refers to itself and iterative calculation never goes on. Average-balance interest is the market convention and is more precise, but it makes the file circular. Where the difference is small — and where balances are being swept out of the average, it is small — the trade is worth it, because a model with no circularity cannot drift onto a wrong answer when somebody edits a formula. Say out loud that you know why the convention was chosen.
Earnings quality behind the entry multiple
A valuation struck on an earnings multiple has to say what is in the earnings. Ask which figure the multiple is on, what the reconciliation contains, and whether each add-back is something that happened or something forecast to happen. Leverage quoted on adjusted earnings and leverage quoted on reported earnings are different numbers, and quoting only the first is quoting the seller's number. Where the whole basket sits well inside the twenty-five percent cap a customary credit agreement would set, it is a disclosure point rather than a covenant point — but a cost labeled non-recurring that has recurred three years running is a run-rate cost wearing a costume.
Returns attribution, and the exit multiple you do not control
Total value created decomposes into growth in earnings, expansion in the exit multiple, and deleveraging. 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. Holding exit equal to entry zeroes the middle bucket by construction, which is the honest way to underwrite, because the exit multiple is the one variable in a buyout the sponsor does not control. Then go one level further and split the growth bucket into volume at the entry margin and margin expansion — margin expansion is the part that has not happened yet.
Management incentives leak value before the fund sees it
An option pool struck at the sponsor's entry equity value and vesting on a sale takes its percentage of the gain above invested capital, not of the whole exit equity value. It comes out before anything reaches the fund, and it is the largest single deduction in the waterfall as well as being one of the three questions. Stopping the model at exit equity value is the most commonly forgotten step in a full LBO and it costs marks twice.
The returns matrix is not monotonic in both directions
Build the grid across exit multiple and exit year and read it, do not just fill it. The multiple of invested capital rises with both a later exit and a higher multiple. The IRR does not: at a high exit multiple an earlier exit annualizes better, while at a compressed multiple holding longer lets deleveraging do the work. That crossover is the whole reason the exit-year axis is more informative than an entry-by-exit grid, and a candidate who assumes the grid rises in both directions has filled it without reading it.
Price discipline as a closed form
'What is the return?' and 'what would you pay?' are different questions. The second holds the return at the hurdle and solves back for the entry multiple, converting a readout into a negotiating position. In a structure where the entry multiple flexes only the equity check and the goodwill — leaving every cash flow, the debt schedule and the exit bridge untouched — sponsor equity is linear in the entry multiple and the answer inverts algebraically in one line. Recognizing that is faster and more defensible than searching for it numerically, and the algebra is worth carrying in your head.
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
- —Three-statement LBO that balances in every projected year
- —Purchase price allocation and the goodwill bridge, proven both ways
- —Intangible write-up and the deferred tax liability it creates
- —Five-tranche structure with a PIK strip and a two-way revolver
- —Original issue discount, capitalized financing fees and their amortization
- —Working capital driven off days rather than a percentage of revenue
- —A base-rate floor that binds in the back years
- —Cash sweep in documented priority order
- —Exit multiple by exit year returns matrix
- —Returns attribution, including value leaked to management
- —Back-solving the entry multiple for a target IRR as a closed form
Memo
The written recommendation and how it was reached
The 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
Frequently Asked Questions
What exactly do I hand in?
The completed workbook and three typed answers in the shaded cells on the Cover tab. That is the entire deliverable — there is no memo, no deck, no presentation and nothing to talk through afterward. Everything you want credit for has to be visible in the file, which is why the directions ask you to write down any assumption you made for something the package did not provide.
In what order should I build the six tabs?
Transaction, income statement down to EBIT, debt schedule, then back to fill the interest block, then cash flow, then balance sheet, then returns. The balance sheet cannot close until the schedules that feed it exist, and the interest block cannot be filled until the debt tab does. Candidates who build strictly left to right stall at the interest lines with an hour gone and no debt schedule.
Why is there no discounted cash flow?
Because an LBO modeling test values the business at a stated multiple, so there is nothing to triangulate. There is no cost of capital, no terminal value, no comparable companies, no precedent transactions and no football field in this exercise, and the directions say so. Adding any of them to a build that already carries purchase accounting would not fit two hours, and making one up would misteach the archetype.
Should interest be on average or beginning balances?
Beginning, on every tranche, and the directions say so explicitly along with an instruction not to switch on iterative calculation. Average-balance interest is the market convention and is more precise, but it makes the model circular. Beginning balances remove the circularity, which is what lets every check row in the file be trusted. If you normally build it the other way, say so on the tab — knowing why a convention exists is worth more than the convention.
My balance sheet does not close. Where do I look first?
Look at the pattern before you look at the formulas. Off by the same amount in every year means the error came out of the opening balance sheet, so go back to the transaction tab — the usual culprits are funding the uses with face rather than net proceeds, capitalizing the transaction expenses instead of expensing them, or omitting the deferred tax on the write-ups. Off in one year only means it is that year's flow, and the usual culprits there are a non-cash charge added back on one statement but not the other, or the in-kind accrual booked in two of the three places it belongs.
Do the working capital days on the assumptions tab match the historicals?
Check, rather than assume. Computing days off the last actual balance sheet takes four seconds and is one of the higher-value four seconds in the exercise. If the given days are tighter than the implied ones, the first projected year contains a one-time working capital release you did not underwrite, and whether that release is a plan or a hope is a real question about supplier terms. Either answer is defensible; not noticing is not.
How do I answer the third question without searching for it?
Work out what the entry multiple actually changes. It moves the equity purchase price, the sponsor check and goodwill — and nothing else. Every operating line, every cash flow, the whole debt schedule, the exit enterprise value and the exit net debt are identical, and goodwill is not amortized so it never touches the income statement. Sponsor equity is therefore linear in the entry multiple, and with an option pool struck at the entry equity value the required equity at a target multiple of invested capital falls out of one rearrangement. Write the algebra and invert it.
How much does formatting really matter?
It is stated as graded, as it is on real modeling tests. Blue for a hardcoded input, black for a formula on the same tab, green for a link to another tab. A hardcoded number buried inside a formula is marked down even when it is right, because the next person to open the file cannot see it. One related habit pays for itself here: pin references to single-cell assumptions with dollar signs, or the row you meant to fill right walks onto empty cells in every column but the first.
What if I am running out of time?
Type the three Cover answers before you do anything else — they are a third of the deliverable and take ninety seconds once the returns tab computes. After that, cut the credit statistics first and trim the returns matrix to the row containing the base case second. Do not cut the check rows and do not cut the attribution bridge. A model that ties, with a bridge showing where the value came from, beats a fuller model whose owner cannot say why the number is what it is.
Is anything left out by design that I should mention?
Yes, and naming it is free marks. At this level of leverage the interest limitation on business interest deductions would bite in the early years, and a real structure would carry disallowed interest forward. It is excluded here because the carryforward schedule does not fit two hours. Also absent by design: no management rollover, no covenant package, no purchase price adjustment, no escrow, and no Excel data tables anywhere. Every sensitivity is a real formula, so the base-case cell of the grid (the middle row of the last column, since the base hold is the longest of the three exit years) reproduces the base case and can be proven to.
Does this format still come up?
It is the standard second-stage screen for private equity associate hiring, and the two-hour full LBO with purchase accounting is the version firms use when they want to see whether a candidate can carry a balance sheet rather than just a returns calculation. It is hard to fake: a three-statement model either closes in every year or it does not, and a debt schedule with a two-way revolver either behaves in a negative year or it does not. Thirty seconds of scrolling tells an interviewer which.
About This Full LBO Modeling Test Case Study
Full LBO Modeling Test case study for private equity interviews. 120-minute format covering three-statement lbo that balances in every projected year, purchase price allocation and the goodwill bridge, proven both ways, intangible write-up and the deferred tax liability it creates. 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.
120-Minute Format
The time limit a real assessment would give you
Excel Model
Included in the model answer
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