I'm building a football field for a pitch deck that includes an LBO. The MD has asked us to run the LBO row of the football field at 15-25% IRRs. My VP is telling me that I need to run these sensitivities such that there isn't any multiple expansion - am I totally losing it or is this not even possible when you are assuming the IRR?

My argument is that if you are holding IRR constant, you need to flex either the entry or exit multiple (and thereby introduce the possibility of multiple expansion or compression) to get yourself the target 15/25% return i.e. if you hold both entry and exit multiple constant you just get the IRR as an output rather than an input

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Basic 3 ways to flex an LBO:

1) Multiple expansion (can't do it in this case)

2) Leverage (change debt levels and rates)

3) Growth (Rev, margins, EBTIDA etc.)

@TissotFrog hits the nail on the head with the 3 ways to grow equity value as a sponsor. If your VP wants to assume multiples stay flat during the holding period, which is a common/conservative assumption, then you need to pull on the other two levers to achieve the targeted IRR, being 1. EBITDA growth, and 2. increased FCF generation to pay off debt. For the first one, thinking simply, you would pull levers to grow EBITDA on a dollar basis (ie. \$100mm @ 8.0x entry > \$150 @ 8.0x exit). For the second lever, you would change things that contribute to FCF growth so you can more aggressively de-lever the OpCo.

Array

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Hold the financial assumptions, etc, constant. Hold leverage and exit multiple constant. Flex entry TEV.

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