Entry multiple

The entry multiple is what the buyer pays, expressed as a multiple of the earnings it is buying. In a buyout it does more work than in any other transaction, because of an asymmetry in how the two sides of the funding are sized. Lenders fund a number of turns of EBITDA. They do not fund a percentage of the price. So every extra turn of price is funded entirely by the sponsor's own equity.

That makes entry price the most powerful lever in the model and the one a bidder controls completely, which is uncomfortable in a competitive auction where paying less is how you lose. A sponsor that pays a turn more has raised its own equity cheque, lowered its return at every exit multiple, and taken on the risk that the extra turn is not there on the way out.

The exit multiple is the same concept at the other end of the hold, and the convention around it is worth knowing. Respectable underwriting assumes the exit multiple equals the entry multiple or is lower, because assuming the market pays more later is a bet on conditions nobody controls. A model that only clears its target return with an exit multiple above the entry multiple is really an argument about the market rather than about the business.

Two refinements matter in practice. The multiple has to be measured on the same EBITDA the debt is sized against, which is the diligenced figure rather than the vendor's, and on the same basis at both ends of the hold. And a larger business is often valued more highly than a small one, so a platform that grows from 40 to 75 of EBITDA can defend a flat multiple more easily than a business that has stayed the same size.