Why are sensitivity tables used with purchase and exit multiples in an LBO?

Why are sensitivity tables used with purchase and exit multiples in an LBO?

• A. Show a range of purchases and exits through sensitivity analysis.
• B. To lock in a single scenario.
• C. To determine tax impact.
• D. To confuse investors.

Answer: (C)

Sensitivity tables with purchase and exit multiples are used to show how a deal’s returns change across a range of potential multiples. In an LBO, the entry multiple sets the purchase price relative to a company's earnings, while the exit multiple determines what the business might be worth at exit. By laying out many combinations of these two multipliers, you can see how metrics like IRR and equity cash-on-cash respond to multiple expansion or compression, debt paydown, and operating performance. This helps you assess risk and identify how robust the deal is under different market conditions. So the tool isn’t about locking in a single scenario, determining tax impact, or trying to confuse investors. It’s about mapping a spectrum of possible outcomes to understand sensitivity to entry and exit pricing.

Sensitivity tables with purchase and exit multiples are used to show how a deal’s returns change across a range of potential multiples. In an LBO, the entry multiple sets the purchase price relative to a company's earnings, while the exit multiple determines what the business might be worth at exit. By laying out many combinations of these two multipliers, you can see how metrics like IRR and equity cash-on-cash respond to multiple expansion or compression, debt paydown, and operating performance. This helps you assess risk and identify how robust the deal is under different market conditions.

So the tool isn’t about locking in a single scenario, determining tax impact, or trying to confuse investors. It’s about mapping a spectrum of possible outcomes to understand sensitivity to entry and exit pricing.