Private Equity Multiple Expansion
Is Entry/Exit multiple expansion based off of the Total Enterprise Value negotiated at Entry or off of Total Uses (Purchase Price)?
To clarify - if a deal is negotiated to be purchased at a TEV of 5.0x, but transaction fees and expenses bring the Total Uses to 6.0x, then at Exit, the business is sold for 6.0x, would this be considered multiple expansion?
I want to know because we recently closed on a deal that was not on a cash-free-debt-free basis and we put a large amount of cash on the balance sheet. So technically, we purchased for a very low EBITDA multiple.
Please advise.
I'd think Total Uses are different from Purchase Price + Refinance Net Debt and you saw a 1x multiple expansion. Would be curious to hear other thoughts.
Multiple expansion is used in terms of enterprise value. You want to keep transaction costs out of the equation when discussing the "value" of the company. Couple ways to think of it - in your example, if you are saying "sold for 6.0x" - it woud be assumed the TEV was 6.0x at exit, which would be multiple expansion. Broadly speaking, let's say one firm had 0.5x of transaction expenses, and another firm had 1.5x worth of transaction expenses (all else being equal). Most industry professionals would not say there is 1x of multiple expansion because one firm had higher transaction expenses. This is not to say there isn't a real impact on returns, which is where the Total Uses comes in.
No.
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