What makes a good LBO candidate?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Stable, predictable cash flows (enables debt service). Strong market position (pricing power protects margins). Low capex requirements (more FCF for deleveraging). Multiple value creation levers (not just cost cuts). Defensible moat (switching costs, contracts, regulation). Experienced management willing to stay. Reasonable entry valuation (below 10-12x EBITDA for a mature business). Clear exit path with 3+ potential buyers.
WHAT INTERVIEWERS LISTEN FOR
- ✓Stable predictable cash flows
- ✓Strong market position
- ✓Low capex requirements
- ✓Multiple value creation levers
- ✓Clear exit path
COMMON MISTAKES
- ✗Focusing only on cost cuts
- ✗Ignoring management retention
- ✗Overpaying at entry
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