Question on entry multiple and exit multiple
Hi all, I have had an interesting conversation with a friends of friend. During the conversation she said "entry multiple should always be higher than exit; otherwise you have low return". I was trying to validate her statement. Can anyone help me on the matter?
What's An Exit Multiple?
Your friend doesn't know much.
1) If your entry is lower than your exit, that will reduce your IRR, ceteris paribus. 2) Generally, people assume entry = exit multiple when modeling, unless you are at a Growth Equity shop.
Your friend is the best type of investor. Buy high, sell low. You need to find these types of people to offload some shit investment you made.
It's really not unusual to use a lower exit multiple than your entry. Reason being you'd like to err on the side of conservatism. Multiples are based primarily on growth prospects and it's hard to imagine that a business will have better growth potential when you go to sell it five years from now. If anything, it's likely expanded in the time you've owned it and the growth prospects more limited, thus a lower multiple.
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