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Ref T-09 · Model Review · 18 min read · Updated July 2026

What a VP Marks Up in Your First LBO

A private equity model-review guide to the assumptions, debt logic, checks, and judgment a VP will challenge in your first LBO.

By Andrew Gallagher · Published July 2026

Your sources and uses tie. The base case shows a 20%+ IRR. The workbook opens without an error message. You send it.

The review comes back with 14 comments. Only one is about formatting.

That is the gap between building an LBO and having one reviewed. A junior often sees a calculation exercise. A VP sees a decision package that may need to survive another associate, an investment committee, a lender, and six months of new diligence.

The real question is not, “Did Excel calculate?”

It is, “Can I trust this model, understand what drives it, and make a decision from it?”

This guide shows how to answer that question. It is deliberately different from the step-by-step LBO build guide and the common modeling-traps guide. Those pages teach the mechanics and the fixes. This one teaches the review order, what common comments mean, and what a strong second draft looks like.

Professional modeling standards and current LBO guidance support the principles below. The exact review sequence and sample comments are a practitioner framework, not a universal firm rubric. Every fund has its own conventions.

The review starts with trust, not IRR

A VP may glance at the returns first, but the number is provisional until the model earns trust.

That trust comes from structure. The ICAEW Financial Modelling Code emphasizes consistent formulas, distinct inputs and outputs, transparent logic, and visible checks. Microsoft’s own Excel guidance recommends keeping constants in dedicated cells instead of burying them inside formulas, and its formula-auditing tools are built around the same idea: a reviewer needs to trace where a number came from and where it goes.

For an LBO, the commercial standard is just as important. The OCC and FDIC’s current leveraged-lending principles emphasize sources of repayment, capacity to de-lever, and analysis of performance against projections and their assumptions. PwC’s financial-due-diligence framework centers on quality of earnings, working-capital requirements, and the cash-flow levers that affect price.

Put those together and the review has two simultaneous jobs:

  • Mechanical integrity: Does the workbook calculate and reconcile?
  • Commercial integrity: Do the assumptions and outputs describe a financeable investment?

The second job is why a perfectly formatted model can still get torn apart.

Exhibit 01 · Review sequence

The seven-pass VP review

Trust is earned from the top down. A 25% IRR does not rescue a workbook that fails Pass 02.

  1. Instruction compliance

    Did you answer the assignment that was actually given?

    Typical failure: Missing deliverable, wrong case period, changed template, or unsupported extra scope.

  2. Model integrity

    Can I trust the workbook before I debate the assumptions?

    Typical failure: Broken checks, inconsistent formulas, hidden plugs, external links, or unexplained circularity.

  3. Transaction mechanics

    Does the purchase price become the correct sponsor equity check?

    Typical failure: EV-to-equity errors, omitted fees, double-counted cash, or rollover that does not reconcile.

  4. Cash and debt

    Does operating performance become cash, interest, and debt paydown correctly?

    Typical failure: Working-capital sign errors, interest on the wrong balance, a broken sweep, or ignored minimum cash.

  5. Underwriting judgment

    Which assumptions are earned, and which are doing the work?

    Typical failure: Unsubstantiated add-backs, margin expansion without an operating bridge, or upside hiding in base.

  6. Returns and downside

    What breaks the return, and does the downside still finance?

    Typical failure: A decorative sensitivity table, mismatched dates, no liquidity case, or an exit multiple carrying the thesis.

  7. Recommendation

    Does the written conclusion match the model that is on screen?

    Typical failure: An invest recommendation that ignores a breach, a weak return, or an unresolved diligence item.

What gets marked up in each pass

Pass 1: You answered a different assignment

The fastest way to lose confidence is to ignore the prompt.

If the test asks for a five-year hold, one debt tranche, and a one-page memo, do not quietly use a 4.5-year exit, add a mezzanine layer, and submit three pages. In a live deal, the same principle applies to term sheets, diligence instructions, model versions, and committee requests.

A reviewer checks:

  • requested tabs, cases, periods, and deliverables;
  • financing terms and repayment priority;
  • whether the provided template was preserved;
  • whether the model uses the correct valuation date and LTM period; and
  • whether each requested output is easy to find.

Common markup: “Where did this assumption come from?”

That comment usually means one of three things: the prompt did not provide it, the model does not identify it, or the analyst added judgment without explaining the basis. The fix is not a longer formula. The fix is a labeled assumption, a source, and a short rationale.

Declare the controlling source

When management reporting, diligence or quality-of-earnings (QoE) adjustments, and the forecast disagree, I name the controlling source before I build. I also state why it is the best basis for that schedule. Quietly blending sources can double count adjustments, mix unlike periods, or create precision the data cannot support. If a secondary source fills a gap, I label the exception instead of letting the workbook imply one consistent dataset.

Pass 2: The workbook is hard to trust

This is the model-risk pass. The VP is looking for evidence that one quiet error can move through the entire workbook.

Typical review points include:

  • no #REF!, #DIV/0!, #VALUE!, or unresolved circular-reference warnings;
  • formulas copied consistently across a period;
  • inputs entered once and linked everywhere else;
  • no unexplained external links, hidden plugs, or hardcodes inside formulas;
  • consistent signs, units, dates, and case labels;
  • checks that fail loudly rather than returning a decorative zero; and
  • a calculation flow that moves from assumptions to operations to cash to debt to returns.

Excel’s error-checking rules can identify formula patterns that differ from adjacent cells, but automated checks do not prove the model is right. They help isolate where human review should start.

Common markup: “Why is this hardcoded?”

Not every hardcode is wrong. An assumption should be hardcoded once. The problem is an assumption hardcoded in three places, or a constant buried inside a formula where it cannot be flexed, sourced, or reviewed.

Prove the endpoints before trusting the middle

For any adjustment toggle, I test the endpoints before I trust interpolation. At 0%, the model must reproduce the unadjusted case. At 100%, it must reproduce the fully adjusted case. If either endpoint does not tie, the values between them have not been proven.

I also keep each concept in one canonical schedule. Downstream tabs should be thin links, not competing versions of the same logic. Any past miss becomes a local check beside the schedule it protects, where a reviewer can see both the calculation and the control.

Pass 3: The sponsor wrote the wrong equity check

The transaction section has one job: turn the purchase into a fully reconciled funding requirement.

The VP will trace:

  1. LTM or adjusted EBITDA into enterprise value.
  2. Enterprise value through the EV-to-equity bridge.
  3. Cash to seller, refinanced debt, fees, expenses, minimum cash, and any other uses.
  4. Debt, rollover, seller financing, and sponsor equity into sources.
  5. Sponsor equity into the opening investment cash flow used for returns.

The most common review failures are not advanced:

  • cash or debt counted twice;
  • fees omitted from uses but funded by equity elsewhere;
  • management rollover credited as a source without reducing cash paid to sellers, or otherwise counted twice;
  • existing debt refinanced in one schedule but left in net debt in another;
  • minimum cash funded but unavailable in the opening balance sheet; or
  • sources and uses balanced with a plug that hides the actual error.

Common markup: “Show me the check from purchase price to sponsor equity.”

That is a request for a bridge, not another output box. A reviewer should be able to move from headline price to the exact sponsor check without reconstructing the transaction.

Pass 4: EBITDA does not become cash correctly

This is where a model that looks reasonable often breaks.

The operating case must feed free cash flow, and free cash flow must feed the debt schedule. The VP will trace EBITDA through cash taxes, capital expenditures, working capital, cash interest, mandatory amortization, revolver activity, and optional repayment.

The direction of movement matters:

  • more capex should reduce cash and debt paydown;
  • an increase in net working capital should consume cash;
  • higher interest should reduce cash available for the sweep;
  • minimum cash should block optional repayment below the required buffer;
  • debt should not become negative;
  • revolver draws should respect facility capacity; and
  • interest should use a stated beginning-balance, average-balance, or controlled circularity convention.

There is no universal debt-waterfall formula. The correct order comes from the prompt, term sheet, or credit documents. The review question is whether the model follows that order consistently and explains any simplification.

Common markup: “The sweep is paying down debt with cash that does not exist yet.”

This usually points to timing. If interest is calculated on ending debt after an end-of-period sweep, the model may be using the same cash twice. Use beginning or average balances consistently, or control and label the circularity.

Make the sensitivity reflow the whole model

An operating or financing sensitivity must reflow every affected schedule: cash taxes, interest, debt, the cash sweep, and exit net debt before returns recalculate. I also reconcile the ownership period from the entry date to the exit cash flow. An entry bridge year cannot quietly become an extra year of cash generation or debt paydown. If the model earns one more paydown year than the stated hold, the model is flattering the return.

Pass 5: The base case is doing the upside case’s work

A formula can be correct while the underwriting is weak.

The VP will look for assumptions that create return without enough evidence:

  • revenue growth above historical performance without a customer or capacity bridge;
  • gross-margin expansion without pricing, mix, procurement, or implementation support;
  • EBITDA add-backs that are recurring, uncosted, or outside the likely diligence perimeter;
  • capex below maintenance needs;
  • working-capital improvement with no operational owner;
  • synergies captured immediately while costs arrive late;
  • an exit multiple above entry without a clear change in business quality; or
  • a downside that is simply the base case with 1% less growth.

Current private equity research reaches the same conclusion from a different angle. McKinsey’s work on value-creation planning argues that an initiative should connect to cash-flow impact, timing, implementation cost, and an executable operating plan. A model should make that chain visible.

Common markup: “What earns this margin?”

A good answer is not, “Management thinks it can get there.” A better answer identifies the initiative, the baseline, the timing, the cost, the owner, and the sensitivity if it arrives late.

Build the decision case before the detail

In reviewing models and financial screens, I learned that, for many middle-market cases, the first build should establish customer concentration, gross-margin stability, EBITDA margin, and free-cash-flow conversion before it captures every peripheral line item. Those four drivers tell me where the thesis can break and which cases deserve time. Detail comes next, once it improves the decision instead of merely making the model larger.

The same rule applies to capex. If the source material cannot support a maintenance-versus-growth split, I do not invent one. I disclose the data gap, use a conservative range, and show how the return changes across it.

Pass 6: The return is right for the wrong reason

IRR and MOIC are outputs. The VP wants the bridge.

CFA Institute’s private-equity overview describes LBO returns through entry and exit equity values, debt usage, and debt paydown over the holding period. In practice, a useful first returns bridge separates:

  • EBITDA growth;
  • multiple change; and
  • net debt paydown or excess cash.

That bridge is not exhaustive, but it reveals whether the case is being carried by operations, leverage, or valuation.

The VP will ask:

  • What happens with no multiple expansion?
  • Which operating assumption moves IRR the most?
  • Does a lower exit multiple merely reduce the return, or does it break the investment?
  • Does the downside still maintain liquidity and comply with the modeled financing terms?
  • What purchase price reaches the target return under a sober case?
  • Are sponsor cash flows and timing consistent with the stated hold?

If the actual cash flows occur on irregular dates, Microsoft’s XIRR documentation supports using dated cash flows instead of treating every period as equal. The model should use the convention required by the assignment and display it clearly.

Common markup: “Show me the no-expansion case.”

This is not a request for a prettier sensitivity table. It tests whether the deal still works when the market does not bail out the underwriting.

Pass 7: The memo and the model disagree

The final pass is the investment decision.

The memo should not restate the model. It should interpret it:

  • what has to be true for the investment to work;
  • which two or three risks can change price or structure;
  • what the downside says about liquidity and capital protection;
  • what diligence would confirm or kill the thesis;
  • what management must execute after close; and
  • whether the recommendation is invest, pass, or proceed only under stated conditions.

Common markup: “You wrote ‘invest,’ but the downside breaches the revolver.”

That is not a wording problem. The analyst must change the financing, change the price, develop a credible mitigation, or change the recommendation.

Exhibit 02 · Annotated review sheet

What the comments actually sound like

LBO_v14_reviewed.xlsx
AreaSubmittedVP markup
Sources & UsesStructuralTotal equity value is funded as if paid entirely in cash, while rollover is also credited as a source.You counted management's reinvestment twice. Reconcile total equity value to cash paid to sellers, rollover, and sponsor equity.
Interest expenseReturnsCash interest is calculated on ending debt after the sweep.Interest cannot benefit from cash that is not generated until the end of the period. Use beginning or average balances consistently.
Working capitalCashA $4mm increase in NWC appears as a positive cash-flow item.Sign is backwards. Growth consumed cash; your debt paydown and IRR are overstated.
Base caseJudgmentMargins expand 400 bps, but no headcount, pricing, or cost bridge is shown.This is an output, not an assumption. What operational evidence earns the expansion?
ReturnsIntegrityThe model uses a five-year IRR formula against a 4.6-year dated hold.Match the return convention to the actual dates. If cash flows are irregular, use XIRR and show the dates.
Investment memoDecisionRecommendation: Invest. Downside case draws the revolver beyond its capacity.The words and the model disagree. Either solve the liquidity problem, change the price, or change the recommendation.

Worked example: the 20.3% IRR that became 15.9%

Exhibit A

A clean-looking model with two compounding errors

Assume a synthetic business with $15mm of entry EBITDA:

Entry item Amount
Entry enterprise value at 8.0× $120mm
Opening debt at 4.0× $60mm
Fees and funded minimum cash $4mm
Sponsor equity $64mm

The submitted model shows:

  • $22mm of exit EBITDA, including $2mm of full run-rate initiatives that never appear in the operating build;
  • $15mm of exit net debt because an increase in working capital is modeled as a source of cash;
  • $161mm of exit equity at an 8.0× exit multiple;
  • 2.52× MOIC and 20.3% IRR over five years.

The VP marks up two lines:

  1. Remove the unsupported $2mm from exit EBITDA.
  2. Correct the working-capital sign and the resulting cash sweep, increasing exit net debt to $26mm.

The reviewed model now shows:

Reviewed item Amount
Exit EBITDA $20mm
Exit enterprise value at 8.0× $160mm
Less: exit net debt ($26mm)
Exit equity $134mm
Sponsor MOIC 2.09×
Five-year IRR 15.9%

Nothing changed about the exit multiple. Two ordinary review comments reduced IRR by approximately 4.3 percentage points because one overstated EBITDA and the other overstated debt paydown.

The real markup is not “fix the cells.” It is:

Is a 15.9% return enough for this risk, or does the price need to change?

Not every markup has the same priority

A strong analyst triages comments by decision impact, not by how quickly each one can be cleared.

The markup hierarchy

TrapWhat goes wrongHow to catch itFix
Fix nowThe issue changes price, sponsor equity, cash, debt, liquidity, exit equity, IRR, MOIC, or a required deliverable.Recalculate the affected bridge and identify every dependent output before editing.Correct the root logic, rerun the checks and cases, then update the memo.
Explain and defendThe formula works, but the assumption, source, timing, or downside is not credible enough to rely on.Ask what evidence would let another reviewer reproduce the judgment.Add the source and rationale, quantify the risk, and show the case if the assumption misses.
PolishThe answer is correct but difficult to navigate, review, or hand to the next person.Open the file as a cold reviewer and time how long it takes to find price, leverage, returns, downside, and checks.Improve labels, units, order, formatting, comments, and version discipline without changing logic.

Formatting belongs in the third bucket until it creates review risk. A missing unit, mislabeled case, or unreadable sensitivity is not cosmetic if it can cause the wrong decision.

What a strong second draft looks like

Do not clear comments one cell at a time and send the workbook back.

That approach creates three new problems: one fix breaks a dependent schedule, the written recommendation becomes stale, and the reviewer cannot tell what changed.

A strong second turn includes:

  1. A clean new version. Keep the reviewed file intact. Use a simple version convention and remove obsolete drafts from the delivery folder.
  2. Root-cause corrections. Fix the first incorrect input or formula, not every downstream symptom.
  3. A full model rerun. Recalculate every case, sensitivity, check, and output after the edits.
  4. A reconciled memo. Refresh all numbers and rewrite any conclusion affected by the model.
  5. A short change log. State what changed, why it changed, and where the reviewer can verify it.
  6. Open judgment items. If one comment requires a deal-team decision, identify it instead of disguising it as resolved.

A useful return note is short:

v15 changes
1. Corrected NWC cash-flow sign; base IRR moved from 20.3% to 17.8%.
2. Rebuilt interest on average debt; cash sweep and exit net debt updated.
3. Moved $2mm margin initiative to upside pending diligence support.
4. Memo recommendation changed to proceed at or below 7.5x.
Open: confirm minimum-cash requirement with lender case.

The note does not replace the model. It lets the VP reopen the right areas in under a minute.

Rerun the case matrix

Before I call the second turn complete, I rerun the affected case matrix: toggle off, toggle on, upside, and downside. This catches a fix that solves one scenario and quietly breaks another.

My reviewer cover note should take less than a minute to scan: controlling sources and exceptions, changes that affected economics, endpoint and case results, and open decisions with their model locations. It is a navigation aid, not a substitute for the workbook or change log.

The ten-minute pre-submit review

This is triage, not a substitute for the complete LBO audit checklist.

Five questions before you hit send

  • Assignment: Did I deliver the requested model, cases, periods, and memo without changing the rules?
  • Trust: Do all checks pass, do formulas copy consistently, and can I trace every major output to one labeled assumption?
  • Cash: Does EBITDA become free cash flow, revolver activity, interest, and debt paydown in the correct order?
  • Returns: Do sponsor equity, exit equity, MOIC, IRR, dates, and sensitivities reconcile under base and downside?
  • Decision: Does the recommendation reflect the actual risks, liquidity, and return shown by the latest model?

If one answer is “I think so,” the model is not ready. Find the cell, trace the bridge, and prove it.

Sources and methodology

The review framework synthesizes professional spreadsheet standards, leveraged-finance guidance, transaction-diligence practice, current private-equity education, and practitioner judgment. The sample comments and review order are original and illustrative.

These original practitioner observations are generalized from model-review work. All examples are synthetic and contain no confidential company or deal details.

Revision History

Revision History

  1. : Original publication. Added the seven-pass VP review, annotated markup exhibit, worked return correction, second-draft protocol, and pre-submit triage.

Build it, debug it, or practice it

The goal is not a model with no comments. It is a model where every important comment can be traced, corrected, and defended without losing control of the investment decision.

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Related References
How to Build an LBO ModelLBO Modeling TrapsDistribution LBO Case StudyPrivate Equity Interview Questions