LBO question (modeling margin contraction)
Currently working on an LBO modeling test, where EBITDA growth is significant (6x) over the 5 year investment horizon.
Typically on these models I assume entry=exit muliple.....but when EBITDA growth is this high, your IRR becomes pretty insane over the 5 year horizon. To counter this, would you model multiple contraction from entry to exit (i.e. you get in at a 15x EBITDA and exit at a 10x EBITDA)? Logic behind the contraction being that you pay a higher multiple at entry for the upcoming higher growth, but then exit at a lower multiple due to lower future projected growth. Does this make sense at all?
