In an LBO model, how do we forecast a proper exit multiple? I've read that usually the entry one is used, but then in that case we would not be able to calculate it since the point of the LBO model is to actually find an implied entry multiple (and therefore the EV to pay). Am I wrong?
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An LBO model can be set up to 1) determine IRR based on assumed entry and exit multiples OR 2) determine purchase price and / or exit price necessary to hit a pre-determined IRR (e.g., 20%).
In the second scenario as your post suggests, the exit multiple can be linked to the entry multiple / purchase price (e.g., entry = exit multiple). You can than solve for the required purchase price (and therefore entry and exit multiples) that will meet the 20% IRR necessary.
Yes but if I assume that the exit multiple is the same as the entry multiple, then what's the point of finding the EV of the target? With the previous assumption we would already have the EV by multiplying the EBITDA in time 0 by the assumed entry (or exit, since we've assumed they're the same) multiple...
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