What makes a good LBO candidate?
What the interviewer is testing
Linking business characteristics to the ability to carry debt.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Stable, predictable cash flows that can service a lot of debt; low capex and working-capital needs; a strong market position with barriers to entry; room to improve operations or margins; a capable management team; assets that support borrowing; and a clear exit route — all at a sensible entry price.
The full answer
| Characteristic | Why it matters |
|---|---|
| Stable, recurring cash flow | Services debt even in a downturn |
| Low capex and working capital | More cash left to repay debt |
| Strong market position | Protects margins, supports a good exit multiple |
| Operational upside | Cost savings, pricing, add-on acquisitions |
| Strong or replaceable management | Executes the plan |
| Asset base | Collateral for secured lenders |
| Clear exit | Strategic buyers, IPO, secondary buyout |
Poor candidates
Highly cyclical businesses, heavy capex (unless asset-backed), technology at risk of rapid obsolescence, or companies already priced at a premium.
Mistakes to avoid
Saying "high growth" is the key characteristic — stability matters more for leverage.
Follow-ups they may ask
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