Entry/Exit Multiple Selection for PE Firms
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?
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?
Ducimus molestias quia corrupti reprehenderit adipisci quia qui. Dolores delectus nihil quas consequatur enim et. Incidunt iste vero molestias voluptas.
Placeat nam ea nihil cupiditate. Sit libero quos totam blanditiis. Debitis ea eum voluptas. Voluptatem et aperiam sequi ut et perspiciatis aut. Porro culpa totam architecto ea ipsa aut odio. Veniam itaque minima beatae illo iste ut.
Qui explicabo laudantium optio enim sed. Hic nobis dolores accusamus sequi quibusdam. Vitae et similique fugiat aliquid dolor minima. Velit praesentium nobis magnam occaecati aut. Optio blanditiis repellendus vel dolorem minus ipsam. Consectetur nam iure aut vel nesciunt qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...