Walk me through the critical path of a timed LBO build: the order in which you'd construct the model to guarantee you reach a returns number before time runs out.

1. I start with Sources and Uses because sponsor equity is the plug and drives every downstream return. I calculate entry enterprise value as entry EBITDA times entry multiple, size debt off the leverage multiple, and let equity be the residual that balances sources equal to uses.
2. Next I project EBITDA to exit. I grow revenue, apply a margin, then bridge to free cash flow by subtracting cash interest, cash taxes, capex, and any increase in working capital.
3. Then I build the debt schedule with a cash sweep, senior tranche first. To break the circularity quickly, I compute interest on the beginning-of-period balance or enable iterative calculation, and free cash flow sweeps the remaining debt each year.
4. I calculate returns last. Exit enterprise value is exit multiple times final-year EBITDA; I subtract remaining net debt to get exit equity. MOIC equals exit equity divided by sponsor equity, and IRR is roughly MOIC to the one-over-hold-period power minus one. I sanity-check the result against the three levers: deleveraging, EBITDA growth, and multiple expansion.

What the modeling test is actually testing

The timed LBO is a proxy for the job. An associate builds models fast, under deadline, with incomplete information, and is trusted to produce a number a partner will stake capital on. The test measures four things at once:

1. Do you know the critical path? Weak candidates build linearly and run out of time before they reach returns (the only section that matters). Strong candidates build sources & uses → EBITDA → debt paydown → returns first, then backfill. Signal this by narrating your plan before you type: 'I'll get to a returns number first with a simplified debt schedule, then add tranching and sensitivities if time allows.'

2. Can you keep a model internally consistent under pressure? The balance sheet balancing, sources equaling uses, and the debt schedule tying to the cash flow statement are all pass/fail. A model that doesn't tie signals someone who can't be trusted with a live deal.

3. Do you have judgment about assumptions? Given a thin prompt, do you make reasonable assumptions and state them ('I'll assume 25% cash taxes, a 1% mandatory amort on the term loan, and exit at entry multiple'), or do you either freeze waiting for more data or invent aggressive numbers? Stating assumptions out loud is the single most reliable way to signal seniority.

4. Can you sanity-check your own output? After producing an IRR, an elite candidate immediately pressure-tests it: 'A 45% IRR feels too high for these assumptions. Let me check my exit equity... yes, I forgot to net out remaining debt at exit.' Interviewers score self-correction positively and blind confidence in a wrong number fatally.

The meta-signal that separates offers from dings: finishing with a number you can defend. A clean 2.3x MOIC you can bridge into deleveraging, growth, and multiple beats a 'more precise' model that took the whole window and left you no time to interpret the result.

The traps that blow up a timed LBO

Trap 1: Forgetting that sponsor equity is the plug, not an input. Under time pressure candidates sometimes 'assume' an equity check and back into leverage. It's the reverse: leverage is set by the credit market (a turns-of-EBITDA figure), and equity is the residual that makes sources equal uses. Getting this backwards corrupts every downstream return.

Say it out loud: "Debt is sized off leverage (say 6.0x EBITDA) and sponsor equity is the plug: uses minus all the debt and any rollover. The equity check falls out of sources and uses; I never assume it directly."

Trap 2: Netting cash against debt at entry but forgetting it at exit. Candidates compute exit enterprise value (exit multiple × exit EBITDA) and then hand that back as equity value, forgetting to subtract the remaining net debt. Exit equity = exit EV − net debt at exit. This single omission is the most common reason a paper-LBO IRR comes out wildly too high.

Say it out loud: "Exit enterprise value is exit multiple times final EBITDA, but I owe the lenders first: exit equity is exit EV minus the debt still outstanding after five years of paydown, plus any cash that's built up."

Trap 3: Circular-reference paralysis in the debt schedule. Interest depends on the debt balance, which depends on the cash sweep, which depends on cash flow, which depends on interest. Candidates either get a circular-reference error and panic, or leave it un-iterated and report a broken number.

Say it out loud: "There's a circularity between interest and the sweep. In a timed test I'll compute interest on the beginning-of-period balance to break it cleanly, or enable iterative calculation. I'll flag that I've simplified it."

Trap 4: Confusing cash interest with the effect on returns. Candidates sometimes double-count: reducing FCF for interest AND separately reducing exit equity by cumulative interest paid. Interest hits returns once, through its drag on free cash flow available to sweep debt.

Say it out loud: "Interest reduces the free cash flow available to pay down debt: that's its only channel into returns. I don't also subtract it again at exit; the lower debt paydown already reflects it."

Trap 5: Using EBITDA as free cash flow. In a rushed paper LBO candidates sweep full EBITDA against debt, ignoring capex, taxes, interest, and working capital. That massively overstates deleveraging and IRR.

Say it out loud: "EBITDA isn't cash to lenders. I bridge it down: EBITDA minus cash interest, minus cash taxes, minus capex, minus the increase in working capital: that's the free cash flow that actually sweeps the debt."

Trap 6: Applying an IRR shortcut across multiple interim cash flows. The MOIC^(1/n) − 1 shortcut only holds for a single entry outflow and single exit inflow. If there's a dividend recap or interim distribution, the true IRR is higher than the shortcut suggests because cash came back sooner.

Say it out loud: "MOIC to the one-over-n power only works with one cash flow in and one out. With a dividend recap in year three, cash comes back earlier, so the real IRR is higher than that shortcut. I'd solve it properly if I had Excel."