Project Ozric — Inverted Paper LBO: What Would You Pay?
A 20-minute Paper LBO / Ability-to-Pay case study with a complete model answer
Modeled After
Moelis & Company
Moelis & Company's own post-analyst opportunities decks (Class of 2014 and Class of 2015) — their interview-content page states the inverted leveraged-buyout question word for word, giving EBITDA growth, D&A equal to capex, no working capital movement, a tax rate, a fixed debt quantum and its cost, and an exit multiple five years out, and asking how much you would pay for the company today — together with a buy-side capital structure book of the same vintage, whose organizing question is financeability rather than valuation.
The inverted question and the financeability framing are modeled after Moelis & Company. The twenty-minute pencil-and-paper format is a general market 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
Ozric Industrial Fasteners distributes specialty fasteners and Class-C components — screws, rivets, clips, seals — to industrial OEMs and the maintenance operations that keep their plants running.
Ozric Industrial Fasteners
- Sector
- Industrials / distribution — specialty fasteners and Class-C components to industrial OEMs and MRO customers
- Size
- Geography
- United States
- Ownership
- Situation
The Prompt
You are a candidate in a second-round private equity interview. Partway through, the interviewer slides a printed page across the table, gives you a blank sheet and twenty minutes, and stays where they are.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 20 minutes.
PART 1
Debt and Credit — 21 cells
PART 2
Operating Model — 79 cells
PART 3
Ability to Pay — 30 cells
PART 4
Returns Attribution — 23 cells
PART 5
Debt Sizing Check — 25 cells
EXTENSION A
Sensitivities — 108 cells
EXTENSION B
Simplification Costs — 86 cells
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.
- 01
Notice what the page never says
- 02
Ask for what is missing, and state what you assume
- 03
Settle the debt before you touch the price
- 04
Build the cash flow, and notice it does not depend on the price
- 05
Work backwards in four lines
- 06
Sanity check the output three ways, then answer the question
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Ability to pay
The valuation method that asks what a buyer with a stated return requirement and a stated financing can afford, rather than what the business is worth in the abstract. There is no comparable-company set, no precedent transaction table, no discounted cash flow and no football field, because the question is about the buyer's constraints rather than the market's opinion. Every real sponsor runs one before submitting a bid, and every real sell-side bank runs one to work out where the sponsor bids will land.
Why the inversion is one division and not a search
Because the debt is a fixed number of dollars. The interest charge, the free cash flow line, the debt outstanding at exit and the equity value at exit are then all computable before the price is known — so the only unknown left is the equity check, and a required return fixes that directly. Change one thing, and make the debt a percentage of the purchase price instead, and the interest depends on the price, the cash flow depends on the interest, and the price depends on the cash flow. The problem becomes circular and the answer changes. Which of those two worlds you are in is a question to ask, never an assumption to make.
Required multiple of money
A target IRR over a hold period implies a multiple of money: one plus the hurdle, raised to the number of years. It is the divisor in an ability-to-pay solve and the thing worth memorizing, because reading a memorized MoM-to-IRR grid backwards under time pressure costs thirty seconds nobody has. The band the market underwrites to — roughly twenty to thirty percent over five years — corresponds to a range of required multiples narrow enough to hold in your head, and knowing it cold is what turns the last step of the exercise into a lookup.
Free cash flow when capex equals D&A
If capital expenditure equals depreciation and amortization and working capital does not move, levered free cash flow is exactly net income. The add-back and the deduction cancel, and the working-capital line is zero. That collapses a five-column schedule into a single line, which is the reason this variant is set at twenty minutes rather than thirty. It also removes the one thing that would otherwise make the cash build depend on a revenue line — which is why the prompt never gives you revenue growth and never needs to.
Debt capacity as a constraint on price
Two different things limit what a sponsor can pay, and a good answer names both. The return hurdle sets the price at a given debt quantum. Debt capacity is what decides whether the gap between that price and the seller's ask can be closed at all — and it is set by what a lender will commit and by the covenants that come with it, not by what the sponsor would like. A turn of extra leverage does not buy a turn of extra price, because a dollar of debt adds a dollar of purchasing power at close and hands part of it back at exit through five years of after-tax interest and a larger balance to repay.
The fixed-charge coverage ratio
Interest coverage — EBITDA over interest — is the ratio candidates quote and the flattering one. A credit committee sizes on fixed charges: EBITDA less capital expenditure less cash taxes, over interest. Where capex is a meaningful share of EBITDA the two ratios say different things, and quoting only the one that ignores the case's own defining feature is the mark of someone who has not sat opposite a lender. Quote both, say which is binding, and compare it to the customary covenant rather than to a number you like.
Returns attribution on a solved price
The gain above invested equity splits three ways: EBITDA growth capitalized at the entry multiple, multiple expansion applied to exit-year earnings, and cash generation applied against debt. On an ability-to-pay case the entry multiple in that bridge is the one you solved for, which makes the multiple-expansion line a residual rather than an assumption — and its size tells you how much of the answer depends on selling for more than you paid. A fourth channel, value leaking to a management option pool, points the other way, and on an inverted case it comes straight out of the price rather than out of the return.
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
- —Working backward from a target return
- —Required MoM from an IRR hurdle
- —Solving for the entry price, not the return
- —Debt capacity as the binding constraint
- —Returns attribution at the solved price
- —Sanity checking an implied entry multiple
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 Ozric — Inverted Paper LBO: What Would You Pay?
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is an inverted paper LBO?
A standard pencil-and-paper LBO screen run backwards. In the ordinary version you are given a purchase price and asked for the return. In the inverted version you are given the plan, the financing and the exit, told what return the fund requires, and asked what you would pay today. The mechanics are the same — the same cash flow build, the same exit bridge, the same multiple-of-money arithmetic — but the last step is a division instead of a multiplication, and the entry multiple is an output rather than an input. It is the harder variant, and it is closer to what a sponsor actually does before submitting a bid.
How do you solve for the price rather than the return?
In four lines. Work out what the equity will be worth at exit: the exit multiple applied to exit-year earnings, less whatever debt is still outstanding after the cash the business generated. Convert your required return into the multiple of money it demands over the hold — one plus the hurdle, raised to the number of years. Divide the exit equity by that multiple, and you have the largest equity check that still clears the hurdle. Add the debt back, because the debt is part of what buys the company. That is the maximum enterprise value, and dividing it by last year's earnings gives the implied entry multiple.
Why does it matter whether the debt is a fixed amount or a percentage of the price?
It decides whether the problem is a division or a circle. If the lender has committed a fixed number of dollars, sized off last year's earnings, then the interest charge and the entire cash flow line are known before the price is — so the only unknown is the equity check, and the required return fixes it directly. If instead the debt is a percentage of whatever you pay, the interest depends on the price, the cash flow depends on the interest, and the price depends on the cash flow. That version still has a closed-form answer, but it is a different and materially higher one, and it assumes, without saying so, a leverage level the lender may not provide. Asking which world you are in is one sentence and it changes the answer.
What return should I assume if the interviewer doesn't give me one?
Say the number out loud and defend it. The published band for the asset class is roughly twenty to thirty percent over a three-to-five-year hold, and mid-market sponsors typically underwrite to the upper half of it. The failure mode is choosing without saying so, rather than choosing badly. Five points of hurdle is worth about a turn of price on a case like this, so an unstated assumption about the return is a bigger swing than everything in the earnings-quality file put together. Ask first; if you get no answer, state your assumption, and say what the answer would be at the other end of the band.
Is the workbook the thing I complete in twenty minutes?
No. The twenty minutes is a pencil-and-paper exercise with no computer and no calculator, and it fills in zero cells of any spreadsheet. The deliverable is spoken: a maximum price, the entry multiple it implies, and a view on the seller's ask, defended for ten minutes afterwards. The completed model and its blank twin exist as the answer key and as a self-check to key in once you have finished on paper — roughly thirty minutes for the exercise tabs and another thirty for the two extension tabs. Do the paper version first, then open the template and find out where your rounding went.
How do I know whether my answer is sensible?
Three checks, and volunteer all three before you are asked. First, compare the solved entry multiple to the exit multiple you were handed: landing near it means the return is being earned rather than assumed, and landing far below it means the deal is leaning on a re-rating you should be nervous about. Second, look at the equity check as a share of the enterprise value — with the debt fixed, a higher permitted price means a less levered deal, and there is a level beyond which no sponsor writes the check. Third, run the round trip: price the business at your answer, run the deal forwards, and confirm the return that comes back is the return you started from.
What separates a strong answer from a merely correct one here?
Correct arithmetic is the floor. What distinguishes a strong candidate is naming the two withheld inputs before starting, saying out loud why a fixed debt commitment makes the solve a single division, quoting the coverage ratio a lender would actually size on rather than the flattering one, decomposing the return at the solved price rather than stopping at the number, and closing with a recommendation on the ask plus a ranked list of what would change it. What separates the top decile is one sentence about the hurdle: at one end of the market's band you win this asset and at the other you walk away, and nothing about the company changes in between.
About This Paper LBO / Ability-to-Pay Case Study
Paper LBO / Ability-to-Pay case study for private equity interviews. 20-minute format covering working backward from a target return, required mom from an irr hurdle, solving for the entry price, not the return. Includes the full prompt, a tied-out Excel model and an audio walkthrough.
This case study sits in Private Equity, under Paper LBOs. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
20-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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