Project Verrick — Paper LBO with Rollover
A 30-minute Paper LBO case study with a complete model answer
Modeled After
Blackstone
The paper LBO screen Blackstone is reported to run in recruiting, carrying a management rollover sized as a percentage of purchase enterprise value and a full excess-cash sweep, and testing whether the candidate sees that proportional ownership makes the rollover irrelevant to the returns answer.
The exercise format and the rollover framing are modeled after Blackstone. The thirty-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
Verrick Specialty Pharma is a privately held distributor and marketer of specialty pharmaceuticals. It buys, warehouses and ships branded and generic product to hospital systems and specialty clinics, and it also owns the US commercial rights to eleven small branded products it acquired from larger pharma companies and now promotes itself.
Verrick Specialty Pharma
- Sector
- Healthcare — specialty pharmaceutical distribution, plus owned US commercial rights to eleven small branded products
- Size
- Geography
- United States
- Ownership
- Situation
The Prompt
You are a candidate in a second-round private equity interview. Thirty-five minutes into a ninety-minute conversation with three investment professionals, the discussion of your deal experience stops and the interviewer says:
"Verrick Specialty Pharma did four hundred million of revenue last year at a thirty percent EBITDA margin.
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
Assumptions and the minimum information set — given in full
PART 2
Entry and Funding — 32 cells
PART 3
Operating Model — 100 cells
PART 4
Exit and Returns — 26 cells
PART 5
Returns Attribution — 36 cells
EXTENSION A
Rollover Ladder — 46 cells
EXTENSION B
Sensitivities — 67 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
Minute 0 to 2 — ask before you calculate
- 02
Minute 2 to 5 — entry, and the split the rollover forces
- 03
Minute 5 to 14 — the build, using the two shortcuts
- 04
Minute 14 to 21 — exit, then the answer twice
- 05
Minute 21 to 27 — attribution, twice, out loud
- 06
Minute 27 to 30 — the recommendation, with a condition
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
A management rollover
Management takes shares in the new company instead of cash for part of what it is owed on the sale, so a slice of the equity at close is funded by people who were already there. It is usually structured as a tax-deferred exchange, which is why management rolls rather than selling and buying back in, and it is customarily sized somewhere between thirty and fifty percent of management's own proceeds. Here it is quoted a different way — as a percentage of purchase enterprise value — which is convenient for the sponsor and requires one extra step from you before you know what management is actually giving up.
The rollover is a source of funds, not a discount on the price
The business costs what the multiple says it costs; the rollover changes who writes the checks that fund it. On a sources and uses page it belongs on the sources side, beside the debt and the sponsor's cash, against an unchanged use. Treating it instead as a reduction in the purchase price is the structural error in this case, and it is expensive because it is upstream of everything: the enterprise value, the debt quantum, the leverage, the interest bill and the ownership split are all wrong at once, and nothing downstream contradicts it.
Project-level versus sponsor-level returns
Two different questions, and this prompt asks both. The project return measures the whole equity check at close against the whole exit equity value: what the deal made. The sponsor return measures the fund's own capital against the fund's own share of the proceeds: what the fund made. Whether they resolve to the same multiple depends entirely on what the rollover rolled into and at what price. Quoting one number without saying which level it sits at looks, from the other side of the table, like not knowing there were two.
Capitalized purchases of intangibles
Verrick buys US commercial rights to branded products and capitalizes them, so the spend sits below EBITDA and outside capital expenditure. It is a real cash outflow with no row in the standard net-income-plus-D&A-less-capex-less-working-capital template, which is exactly why it gets dropped. This is an attention trap rather than an information trap: the number is stated in the prompt, and the candidate who loses it does so because their template had no line for it, not because they were not told.
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 circularity between the debt schedule and the income statement to resolve — which is why this exercise has no debt schedule at all, an absence that defines the format rather than an omission from it. The cash the business generates is applied against principal in one step at exit. It flatters the answer slightly, because a real annual sweep would have been reducing interest along the way.
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 the exit multiple equals the entry multiple — the base-case convention — the middle bucket is zero by construction, and that is a strength rather than a gap: a return leaning on selling at a higher multiple than you paid is a weaker return, because the multiple is the one variable in a buyout the sponsor does not control. In a rollover deal the bridge has to be said twice, once for the deal and once for the fund.
A rollover is not an option pool
Both are equity that ends up with management and they behave in opposite directions. A rollover is capital management pays for, at the same price and on the same terms the sponsor pays — it funds part of the purchase. An option pool is equity management is given, struck on the gain above invested capital, so it comes out of the gain before the funding holders divide what is left. One is a funding question and the other is a dilution question, and a real term sheet has both. Conflating them is the most common way candidates end up arguing that the rollover costs the fund return. The second question a pool raises is whose gain it is struck on: a pool written on the whole equity dilutes both holders in proportion to what they own, and one written on the sponsor's shares alone does not — and only one of those two leaves the relationship between the deal's return and the fund's return where it was.
The five-year MoM-to-IRR grid
1.5x is about 8%, 2.0x about 15%, 2.5x about 20%, 3.0x about 25%, 4.0x about 32%, 5.0x about 38%, 6.0x about 43%. 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 from a fifth root into a lookup. The companion rule is the sanity check that does real work in this case: a five-year multiple of money above 6.0x means you have made an arithmetic error rather than 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
- —Management rollover as a source of funds
- —Project-level versus sponsor-level returns
- —Post-close ownership from the equity split
- —Capitalized intangible purchases in free cash flow
- —Returns attribution at both levels
- —MoM and IRR without a calculator
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 Verrick — Paper LBO with Rollover
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a paper LBO with a management rollover?
A standard verbal LBO screen with one structural addition: part of the equity at close is funded by management taking shares instead of cash for a portion of its sale proceeds. Everything else works as it does in the ordinary format — enterprise value at a stated multiple, a fixed debt and equity split, flat interest because nothing is repaid until exit, a driver-based cash flow build and an exit at a stated multiple. What the rollover adds is a second question. The fund did not write the whole equity check and does not own the whole exit equity, so 'what does the deal make' and 'what does the fund make' are two separate calculations, and the prompt asks for both.
Why does this case have two returns answers instead of one?
Because the capital invested and the capital the fund invested are not the same number, and neither are the exit proceeds and the fund's share of them. The project return runs on the whole equity check at close against the whole exit equity value. The sponsor return runs on the fund's own cash against its own share. Whether the two resolve to the same multiple of money depends on what the rollover rolled into and at what price, which is one of the two inputs the interviewer withholds. That is the question this case is built to ask, and it is why the deliverable is four numbers rather than two.
Does the rollover reduce the purchase price?
No, and this is the error worth inoculating yourself against before you sit down. The enterprise value is the multiple times the earnings, full stop. The rollover appears on the sources side of the funding page, next to the new debt and the sponsor's cash equity, and it funds part of an unchanged use. Netting it off the price instead gives you a smaller enterprise value, a smaller debt quantum, lower leverage, a lower interest bill and an ownership split you never compute — five wrong numbers from one wrong instinct, and nothing later in the build will contradict any of them.
Which inputs are missing from the prompt, and what should I do about it?
Two, and neither is derivable from what you were told. The first is the ordinary one: without it there is no net income and therefore no cash flow at all, and most candidates catch it. The second is about the rollover itself — how much management is rolling is stated, what it is rolling into and at what price is not — and it is the one that determines the shape of your answer. Ask for both in the first two minutes. The interviewer will answer any factual question about a withheld input, though not a question about method and not a request to confirm an intermediate answer. If you do not spot them in time, say out loud which structure you are assuming and carry on.
Where do the purchases of drug rights belong in the cash flow?
Below EBITDA and outside capital expenditure. Verrick capitalizes the commercial rights it buys rather than expensing them, so the spend never touches EBITDA and it is not part of the capex line — it is a third investment item alongside capex and the working capital build, and it is real cash leaving the business every year. Take all three off after adding depreciation and amortization back. The useful way to hold the whole build in your head is that D&A comes back at six percent of revenue while the three investment lines go out at six and a half, so the net drag on cash is half a point of revenue a year.
Is the workbook the thing I complete in thirty minutes?
No. The thirty minutes is a no-computer exercise: a blank sheet, a pen, and an answer delivered out loud. It fills in zero cells of any spreadsheet. The completed model and its blank twin exist as the answer key, as a self-check once you have finished on paper, and as the download — roughly thirty minutes to key in the four exercise tabs and another twenty-five for the two extension tabs, neither of which is expected in the room. Do the paper version against a timer first, then open the template and find out where your rounding went and which line you dropped.
What is the interviewer's follow-up question?
Every candidate who finishes early gets some version of: what would have to be true about the rollover for those two numbers to differ? It is a structuring question, not an arithmetic one, and the answer is a list — a sponsor preferred sitting ahead of the rolled common, a roll priced at a discount or a premium to the transaction price, an incentive pool struck on the sponsor's shares rather than on the whole equity, vesting or a ratchet that changes the split between close and exit. Each of those breaks the proportionality between what management put in and what it takes out, and each is ordinary in a real term sheet.
About This Paper LBO Case Study
Paper LBO case study for private equity interviews. 30-minute format covering management rollover as a source of funds, project-level versus sponsor-level returns, post-close ownership from the equity split. 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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