Consulting PE diligence is not “tell me about private equity.” It is: at this price, with this leverage, in this hold, does the thesis clear the fund’s return — and which risks eat that return. You owe a returns sketch and a risk map that can kill the deal. You do not owe a full LBO model.
This page is the diligence tree for a consulting case. The private equity case interview guide is the interview format (paper LBO, screening, CDD as a type of PE recruiting case). Use both; do not paste one into the other. Here: buy this portco or not, as a consultant in the room with the deal team.
Two halves: returns and risks
| Half | Question | You must leave with |
|---|---|---|
| Returns | How does money come back? | Entry, cash in hold, exit, rough MOIC / IRR |
| Risks | What breaks that path? | 3–5 risks, which are priced, which are deal-breakers |
If you only list risks, you are a nervous associate. If you only multiply 8.5× EBITDA, you are a tourist.
Returns skeleton (back of page).
Enterprise value = entry multiple × current EBITDA (plus extra for “synergies” only if you will underwrite them).
Debt / equity split.
Hold-year EBITDA via volume, price, mix, cost (one thesis, not five).
Exit EV = exit multiple × exit EBITDA.
Equity value at exit − equity in = profit. MOIC ≈ exit equity / equity in. IRR from MOIC and years (Rule of 72 as a bound).
Risks. Commercial (reimbursement, competition), operational (people who walk), financial (debt / rates), legal, and thesis risk (the growth you paid for is not under management control).
Worked example: dental roll-up, 12 clinics
Prompt. Apex Dental: 12 clinics in two Sun Belt MSAs. EBITDA $18m (after add-backs the banker already “normalized”). Ask $153m (8.5×). Harbor Fund: 50% debt at 8% cash interest, 5-year hold, underwrite exit 9×. Thesis: “DSO density, 4 more de novos, 200 bps margin.” You are CDD / VDD hybrid in 25 minutes.
Returns, base (no heroics).
EV in = $153m. Debt = $76.5m. Equity in = $76.5m.
Interest ≈ 76.5 × 8% = $6.1m / year. If FCF before debt service is thin, this matters.
Assume EBITDA stays $18m (no de novos, no margin). Exit 9× = $162m. Debt still $76.5m if no paydown (ugly but honest if capex eats FCF). Equity out = 162 − 76.5 = $85.5m. MOIC 1.12× in 5 years. IRR ~2%. Dead deal as a no-op.
So the entire return is the thesis, not the current clinic.
Thesis math. 4 de novos: each mature clinic in their book does ~$1.5m EBITDA at year 3; de novo ramp often loses $0.4m in year 1–2. Even a friendly case: +$4m EBITDA by year 5 from de novos if 3 of 4 work. Margin 200 bps on $90m revenue = $1.8m. Exit EBITDA $18 + 4 + 1.8 = $23.8m. Exit 9× = $214m. If debt paydown $15m from FCF, debt $61.5m. Equity out ≈ $152m. MOIC 2.0×. 5-year 2× is ~15% IRR — fund hurdle adjacent, not a home run. If exit compresses to 8× (rates, dental multiple mean-revert): EV $190m, equity out $129m, MOIC 1.7×, IRR ~11%. Fails many PE hurdles.
Risks that eat the 2×.
- Associates leave. Production is 8 lead dentists × ~$1.1m EBITDA influence. Two partners hitting earnout expiry in 18 months. This is the people risk 7S would call staff; here it is EBITDA at risk ~$3m. Not in the banker 8.5×.
- Medicaid mix. 22% of visits. A 4-point mix shift toward Medicaid at $40 lower contribution / visit × 80k visits ≈ $3.2m — wipes the 200 bps margin story.
- De novo execution. Harbor has zero dental operators in the fund. Thesis is not “financial engineering”; it is a capability they do not have.
- Add-backs. $18m includes $2.1m “one-time owner perks.” If $1m is recurring, you paid 8.5× a lie. EV should have been 8.5 × 17 = $144.5m — you overpaid $8.5m on day one.
Recommendation. Do not pay 8.5× unless (a) dentist retention contracted (2-year non-competes, earnout on production), (b) EBITDA quality $17m, (c) price ≤7.5× quality EBITDA ≈ $128m, or (d) you bring an operating partner who has actually opened de novos. At $153m the return is a tight 2× that dies on mix or two associate exits. Walk is allowed.
PE DD versus the PE interview guide
| This page (DD tree) | PE case interview guide | |
|---|---|---|
| Job | Advise a deal team: bid / pass / reprice | Get through a PE recruiting case |
| Core | Thesis, returns, risk that kills MOIC | Paper LBO mechanics, screening, CDD format |
| Output | Recommendation on this asset | Show you can think like an associate |
If you are prepping PE recruiting, use the guide for paper LBO and interview shape. If the consulting case is “should Harbor buy Apex,” use this tree. Do not recite LBO schedule trivia instead of associate-retention risk — and do not skip the MOIC sketch because you are “more commercial.”
When this tree is the wrong tool
Strategic buyer, no fund return. Use M&A: standalone, synergy, price, integration. IRR is optional.
Ops cost-out only, no deal. Operations cost.
Org dysfunction, deal already closed. 7S.
The mistake unique to PE DD cases
Underwriting banker EBITDA and banker multiple as if they were facts. The unique fail is returns on a lie: 8.5× × $18m with $2m of add-backs and no dentist lock-in. Second unique fail: listing industry risks (PPO pressure, DSO competition) without tying them to $3m EBITDA or exit 9× → 8×. Risks that do not hit the returns sketch are decoration.
How to open
“I will sketch MOIC at this price with a no-op case first — that will fail — then put the thesis on de novos and margin, then haircut for associate attrition, mix, and add-back quality. I need to know if Harbor can actually operate dental de novos.”
Then 1.12× versus 2.0× versus 1.7× at 8× exit. The spread is the diligence.
Returns on the page, then the kill risks
Structure a buy/pass with entry multiple and one thesis. If you cannot show MOIC, you are not doing PE DD.