What best describes the role of exit multiples in planning an LBO?

What best describes the role of exit multiples in planning an LBO?

• A. They are the multiples at which the company would be sold and used in sensitivity analysis.
• B. They are the same as purchase multiples.
• C. They are the tax rates.
• D. They are the interest rates on debt.

Answer: (B)

Exit multiples are the sale-price benchmark used at the end of the holding period. In an LBO, you project the company’s EBITDA (or similar metric) at exit and apply a multiple to estimate the exit value, which then determines equity proceeds after debt is repaid. This exit value is a major driver of investor returns (IRR) and is often varied in sensitivity analyses to see how changes in the market at exit would affect outcomes. They’re not tax rates or debt costs, and they aren’t the same as the entry purchase multiple—the latter sets the initial price, while the exit multiple estimates what the business could fetch when you sell.

Exit multiples are the sale-price benchmark used at the end of the holding period. In an LBO, you project the company’s EBITDA (or similar metric) at exit and apply a multiple to estimate the exit value, which then determines equity proceeds after debt is repaid. This exit value is a major driver of investor returns (IRR) and is often varied in sensitivity analyses to see how changes in the market at exit would affect outcomes. They’re not tax rates or debt costs, and they aren’t the same as the entry purchase multiple—the latter sets the initial price, while the exit multiple estimates what the business could fetch when you sell.