LBO entry and exit multiples explanation
Would someone be able to explain the concept of entry and exit multiples for an LBO? I understand all about LBOs but do not understand anything and the entry and exit multiples.
It is literally the multiple that you “enter” at as well as the multiple you expect to “exit” at.
You might assume the exit multiple to be the same as your entry multiple, meaning if the target is acquired at 10x EV/EBITDA, it will be sold at the same multiple at a future period.
You often run different sensitives on the exit/entry multiples as well.
Why do we make this assumption, can we not grow the multiple?
You don't necessarily assume that. Google "multiple expansion."
“In practice, the majority of LBO models use the conservative assumption of exiting at the same multiple as the entry multiple.
Given the amount of uncertainty regarding the market conditions and unforeseeable events that could have a significant impact on the exit multiple, the recommended industry best practice is to set the exit multiple assumption equal to the purchase multiple.
Even if the private equity firm expects to take actions during its ownership period that could increase the exit multiple (and returns), the most important takeaway is that the private equity firm’s thesis and expected returns should not be overly reliant on selling at a higher valuation.”
https://www.wallstreetprep.com/knowledge/multiple-expansion/
If you do not understand the concept of entry/exit multiples, then you actually do not understand anything about LBOs.
"I understand all about math except for addition and subtraction."
This has been making the rounds: MultipleExpansion.com
Great free lbo model guide / template; goes through concepts like Multiple Expansion in detail
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