Hi Monkeys,
I was taught that PE firms use EBITDA multiple to determine purchase and exit price. But in the real world, do you use other multiples?
1. Why don't you use P/E? You make payment for equity, and receive equity value in the end anyway.
2. Would you use EBIT multiple instead if you purchased a manufacturing target?
What's an exit multiple?
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Earning dependent on current financing structure which is irrelevant in LBO. After LBO earnings can be negative so both not great metrics for valution in this case.
Yes. Or EBIT - (maintenance) capex. You don't want to include amortization as all costs releated to generate cash from the goodwill are already included in EBIT (no capex required to maintain goodwill if you get what I mean.
Thanks for sharing your insight.
So my understanding is that, using P/E usually assumes the target has a relatively stable capital structure, but that's not the case in LBO because the PE firm will replace the current structure with a new one and the interest expense and hence the earning can be greatly impacted. Not sure if I'm bad at understanding..
When I worked at a PE, banks did send pitchbooks to us with P/E used in comparable analyses though. We didn't pay much attention to that nevertheless. And all banks, including BBs, only used EBITDA multiple for LBO analysis when the target was a heavily capital-intensive pharma. Not sure why it was the case.
And would you use multiples like EV/Sales?
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