12.1.1.2.1. Exit Strategies
An LBO’s exit multiple is the target’s projected EV/EBITDA (or some other valuation multiple) at the time the acquirer plans to exit. The concept of an exit multiple is central to LBOs, but it also applies more broadly. Any financial buyer planning to eventually divest itself of an acquisition will likely have an expected exit multiple.
The expected exit multiple is used to project the acquirer’s profit upon exiting the LBO. Recall that the acquirer’s profit is the growth in the target’s equity value. Because it is based on estimates, this is an implied equity value. Deriving an implied equity value from an EV-based multiple such as EV/EBITDA is a process you might recognize from Chapters 3 and 4. The idea is to use the EV-based multiple to get an implied EV, and subtract net debt to get implied equity value. (It’s unlikely preferred stock or non-controlling interests would show up on an LBO question.) If an exam question gives you an exit EV/EBITDA, as well as projected figures for the target’s EBITDA and net debt at the time of exit, then you can estimate the exit equity value as shown in the following example question.
Example Question
Suppose the purchaser expects an exit EV/EBITDA multiple of 6.5x on a Year 5 EBITDA of $40mm, with net debt