Project Priorsgate — Paper LBO on a Forward Multiple
A 30-minute Paper LBO case study with a complete model answer
Modeled After
KKR
KKR 2013 SEO Case Study Best Practices — its model audit protocol (cumulative free cash flow must tie to the change in net debt from close to exit; re-check the return calculation in the exit year), its 'a reversion to mean is the assumption, not the explanation' discipline on exit multiples, and its standard that there is no right answer provided you can explain how you built your base case.
The judgment standard and the returns-check protocol are modeled after KKR. The thirty-minute pencil-and-paper format and the forward-multiple variant are general market conventions rather than any one firm's, and the company, the capital structure and every figure in this case are entirely our own.
The Situation
Priorsgate Discount Stores
- Sector
- Consumer / retail — deep-discount general merchandise stores, all leased
- Size
- Geography
- United States; the Southeast and the lower Midwest
- Ownership
- Situation
The Prompt
You are a candidate in a first-round private equity interview. Five minutes in, the interviewer slides a printed page across the table, gives you a blank sheet and thirty minutes, and leaves.
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 30 minutes.
PART 1
Entry and Funding — 20 cells
PART 2
Operating Model — 90 cells
PART 3
Exit and Returns — 17 cells
PART 4
Returns Attribution — 16 cells
PART 5
Basis Check — 21 cells
EXTENSION A
Sensitivities — 42 cells
EXTENSION B
Simplification Costs — 44 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
Read the basis before you read the numbers
- 02
Run the checklist and ask for what is missing
- 03
Take the entry in three multiplications and say the leverage out loud
- 04
Build the cash flow as one line, not five columns
- 05
Use the shortcut the forward multiple hands you
- 06
Attribute the return, then answer the question that was asked
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
A forward multiple
A multiple struck on the next twelve months of earnings rather than the last twelve. At entry that means the price is set on the year you are about to own, so the enterprise value is higher than the same multiple of trailing earnings by exactly one year of growth. The two are the same price described on two different bases. A candidate quoting one basis while the interviewer thinks in the other will spend the defense arguing about a gap that does not exist.
Why a forward exit multiple adds a projection year
The exit multiple is applied to the twelve months following the exit date. Sell at the end of Year 5 and those twelve months are Year 6 — a year that sits entirely outside the hold. So the earnings projection runs six years while the cash flow build runs five, and the sponsor never owns the year that sets the sale price. Building a sixth year of free cash flow is the mirror-image error: it implies you owned a business you had already sold.
The minimum information set
Capital structure, duration, projected EBITDA, D&A, cost of debt, tax rate, both cash flow components and the exit multiple. Nine items, and the exercise cannot be completed with one missing. Knowing the list cold is what turns spotting a gap into a four-second check rather than a four-minute stall halfway through the build. The failure mode here is an unstated assumption rather than a wrong one — a considered estimate and a lucky guess look identical from the other side of the table unless you say which one you are making.
Capex is not D&A
The reflex is to set capital expenditure equal to depreciation and move on. For a discount retailer still opening stores, that assumes the growth being underwritten costs nothing to produce. Capex here runs meaningfully above depreciation and scales with revenue rather than sitting flat, which makes it the largest single cash cost in the build and the one most capable of moving the answer. The prompt does not state it, which is not an oversight.
No debt paydown until exit
The defining simplification of the paper-LBO tier. If the debt balance never moves, interest never moves, so there is no circular relationship to resolve and no debt schedule to build. At exit the accumulated cash is applied against the entry debt in one step. It flatters the answer slightly, because a real sweep would have been reducing interest along the way — but in a business whose cash flow is back-loaded, the cash that would have swept early is the small part, so the distortion is far smaller than candidates assume.
Returns attribution
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. Where entry and exit multiples are equal the middle bucket is zero by construction, which is a strength rather than a gap — a return that leans on selling at a higher multiple than you paid is weaker, because the multiple is the one variable in a buyout the sponsor does not control. Run the bridge on a single consistent basis at both ends; mixing them is what breaks it.
The five-year MoM-to-IRR grid
Roughly: 1.5x is 8%, 2.0x is 15%, 2.5x is 20%, 3.0x is 25%, 3.5x is 28%, 4.0x is 32%, 5.0x is 38%. Memorize it and interpolate between the two nearest rows. It is accurate to well inside a percentage point, which is far tighter than the precision of a paper LBO's inputs, and it turns the last step of the exercise from a fifth root into a lookup. The companion rule is a sanity check: a multiple of money above 6.0x over five years means you have made an arithmetic error, not found a great deal.
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
- —Forward versus LTM multiple at exit
- —Six-year projection when the exit is forward
- —Capex-heavy free cash flow
- —Cumulative debt paydown
- —Returns attribution
- —MoM and IRR
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the Excel model and the audio walkthrough.
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 Priorsgate — Paper LBO on a Forward Multiple
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a paper LBO on a forward multiple?
A standard pencil-and-paper LBO screen with one variation: the purchase and sale prices are struck on the next twelve months of EBITDA instead of the last twelve. That changes two things. At entry, the price is a multiple of the year you are about to own, so the enterprise value is higher than the same multiple of trailing earnings. At exit, the multiple applies to the twelve months after the sale date, so the earnings projection has to extend one year beyond the holding period. Everything else — the capital structure, the flat interest, the cash flow build — works exactly as it does in the ordinary format.
Why does the projection run six years when the hold is only five?
Because the exit multiple is forward. Standing at the end of Year 5 on the day of sale, the next twelve months are Year 6, and Year 6 earnings are what the buyer is paying a multiple of. So you need a sixth year of revenue and EBITDA purely to strike the exit price. What you do not need is a sixth year of free cash flow: the sponsor has sold the business by then and never collects that cash. Projecting six years of earnings and five years of cash flow is the correct shape, and it looks lopsided until you see why.
Do I have to project the sixth year, or is there a shortcut?
There is a shortcut, and it is worth carrying out of this case. When the entry and exit multiples are equal and both are struck on a forward basis, enterprise value compounds at exactly the EBITDA growth rate across the hold — so the exit enterprise value is the entry enterprise value grown at the growth rate for the length of the hold. No sixth year required. Use it to save two minutes, but state out loud that the number equals the exit multiple applied to the forward year, because otherwise the shortcut looks like a guess.
Which inputs are missing from the prompt, and what should I do about it?
Two, and neither is derivable from the rest. One is a cash flow component that is the largest single cost in the build and that a retailer opening stores does not spend at the level of its depreciation. The other exists only because the exit multiple is forward and concerns the year beyond the hold. Ask for both in the first two minutes, while the interviewer is still in the room — they will answer any factual question about a withheld input, though not a question about method. If you do not spot them in time, say out loud what you are assuming and why, then keep moving.
Is the workbook the thing I complete in thirty minutes?
No. The thirty 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 multiple of money, an approximate IRR and a recommendation, defended for fifteen 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 twenty-five for the two extension tabs. Do the paper version first, then open the template and find out where your rounding went.
How do I quote leverage when the multiple is forward?
Pick a basis, state it, and stay on it. Leverage on forward EBITDA is lower than leverage on trailing EBITDA for the same dollars of debt, and both are legitimate — lenders and sponsors quote both, and a third figure exists on reported rather than adjusted earnings. The mark of someone who has priced a real deal is saying which basis they are on before quoting the number, and being able to convert to the other one on request. Ask what sits inside Adjusted EBITDA too; it costs four seconds and any multiple-based valuation should state what is in the earnings.
What separates a strong answer from a merely correct one here?
Correct arithmetic is the floor. What distinguishes a strong candidate is spotting the forward basis in the first thirty seconds, asking for both withheld inputs before the interviewer leaves, narrating the rounding as it happens, decomposing the return into growth, multiple and cash rather than stopping at the number, and closing with a recommendation tied to the assumption the return depends on. The interviewer is grading whether you can explain how you built your base case and what you would flex for upside and downside — not whether you landed on their exact figure.
About This Paper LBO Case Study
Paper LBO case study for private equity interviews. 30-minute format covering forward versus ltm multiple at exit, six-year projection when the exit is forward, capex-heavy free cash flow. 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.
30-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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