What the LBO calculator actually computes
An LBO model answers one question: given an entry price, a debt stack, and an operating plan, what equity return does the sponsor earn at exit? Everything else — the income statement, the debt schedule, the working-capital build — exists to support that calculation.
The calculator above runs the minimum-viable version of that loop. At entry it computes enterprise value (EBITDA × entry multiple), pulls out debt (EBITDA × leverage), and treats the residual as sponsor equity. Each year of the hold period it then advances EBITDA by the growth rate, deducts D&A, interest, taxes, and CapEx, and sweeps the remaining free cash flow against the debt balance. At exit it values the business at the exit multiple, subtracts whatever debt is left, and computes MOIC (exit equity ÷ entry equity) and IRR (the discount rate that makes the cash-flow vector net to zero).
Two assumptions are baked in to keep the inputs minimal: D&A is set to 8% of EBITDA and CapEx to 7% of EBITDA. The tax rate is 25%. In a real model these are line-by-line forecasts, but for a quick screen these defaults are close enough to where a healthy services or industrial business actually runs.
MOIC vs IRR — pick the right one for the question
The calculator outputs both numbers because both matter for different reasons:
- MOIC tells you the absolute multiple of capital returned. A 2.5x MOIC means $1 of equity came out as $2.50, independent of hold period. PE fund LPs care about MOIC because it measures the dollar size of the win.
- IRR tells you the annualized rate at which capital compounded. A 20% IRR over 5 years and a 20% IRR over 8 years are very different absolute outcomes but the same rate of return. Sponsors care about IRR because it's how their carry is measured and it's comparable across deals with different hold periods.
The two can diverge sharply. Blackstone's Hilton deal earned a 2.5x MOIC over a 6+ year hold — a $14B absolute win on $5.6B of equity — but only a 18.7% IRR because the hold period stretched across the 2008 crisis. The MOIC was heroic; the IRR was good but not extraordinary. If you only ran the IRR you'd underestimate the deal.
The opposite happens with quick flips: a 2-year hold at 1.7x MOIC looks weak in absolute terms but its IRR is closer to 30%. Same MOIC at 7 years would be a disappointing ~8% IRR.
Three inputs sponsors fight over hardest
1. Exit multiple
The single most consequential input — and the one with the least objective basis. Sponsors typically underwrite an exit multiple equal to or slightly above entry, on the theory that multiple expansion is a real lever (better margin, faster growth, cleaner financials at exit). LPs and IC members push for flat or contracted multiples because exit timing is uncontrollable. Try modeling both: enter the entry multiple at exit (the "multiple contraction" case) and see whether the deal still clears your IRR hurdle.
2. Leverage
The leverage input controls how much equity you put in. Higher leverage = lower equity check = same dollar return generates a higher MOIC. But higher leverage also means more interest expense eating free cash flow, less debt paydown over the hold, and more risk of breaching covenants in a downturn. The sweet spot is deal-specific. Toys R Us at 5.7x leverage looked manageable in 2005; the same leverage on Hilton at 8.4x in 2007 turned out to be fine. The difference was operating margin stability and downside protection.
3. EBITDA growth
The growth assumption compounds every input. A 10% EBITDA growth rate over a 5-year hold means exit EBITDA is 1.61x entry — the deal can absorb significant multiple contraction and still hit target returns. A 0% growth scenario means you're entirely dependent on multiple expansion and debt paydown, and the IRR becomes very sensitive to entry-vs-exit multiple delta.
Common LBO modeling mistakes the calculator catches
- Negative equity at entry. If you set leverage higher than your entry multiple, debt exceeds purchase price and sponsor equity is negative. The calculator returns no result — that's a signal you have an input error, not a magical deal. Sometimes this happens when people mix up "debt / EBITDA" (leverage) with "debt / EV" (capital structure weight).
- Treating tax shield as automatic. The calculator applies the tax rate to positive EBT only — losses don't generate a refund. In a real model, NOLs may carry forward and reduce tax expense in recovery years, but you can't spend tax shield you haven't earned.
- Ignoring CapEx in the FCF sweep. The calculator's 7% CapEx assumption is on the low end of normal. A growing industrial business often runs 10-15% maintenance CapEx plus growth CapEx; getting this wrong by 3-5 points compounds into a meaningful debt paydown miss over a 5-year hold.
When this calculator is enough — and when it isn't
For a back-of-the-envelope deal screen, this is enough. You can pressure-test entry multiple, leverage, and growth assumptions in 30 seconds and see whether the deal could plausibly clear a 20-25% IRR hurdle. If it does, run the full model. If it doesn't, you saved an afternoon.
What this calculator omits: tax NOLs and DTAs, working capital changes, refinancing waterfalls, PIK accrual on subordinated debt, management rollover and option pools, transaction expenses, earnouts, contingent consideration, and operating model build-up. For a real investment committee submission you need a model with three integrated statements, a full debt schedule with mandatory and cash-sweep amortization, sensitivity tables across at least three drivers, and a downside scenario. That's what the All-in-One model below provides.