Multiple Expansion Learn Multiple Expansion in Private Equity

At the same time, don’t assume that a company trading at a high multiple has less growth potential than one trading at a low. Take care of everything else, and multiple expansion may follow. If a business is growing rapidly, its margins improve, and it has a strong management team – and you still want to sell? Pirate Capital bought a sailboat business for a total enterprise value of 110.

  1. That means for every $1 in bank reserves, $5.55 could be added to the money supply.
  2. Try to calculate the net new shares from Slack’s options using this formula.
  3. Since the exit multiple was a smaller value than the initial multiple upon the company’s purchase, we can call this multiple contraction or multiple compression.

When preparing a PF balance sheet, incorporate all line items from the Sources & Uses. You can set balance sheet line items that aren’t affected by the Sources & Uses equal to the standalone balance sheet. We’re going to use Revenue, COGS and historical xm broker review working capital to build out the Working Capital Schedule. If you don’t have a decent understanding of the different types of debt used in LBOs, spend ~15 minutes perusing the guides below. A quick read will give you the background knowledge you need.

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Private equity firms often focus on implementing operational enhancements and efficiency measures within the acquired company. The EV/EBITDA ratio compares a company’s enterprise value to its earnings. Helping private company owners and entrepreneurs sell their businesses on the right terms, at the right time and for maximum value.

Every line item in sources & uses must be accounted for in the PF balance sheet. Goodwill and any purchase accounting write-ups are the bridge between the equity purchase price activtrades forex broker review and historical net assets. The historical revenue, EBITDA and D&A are already in place, and we’ve included all the assumptions you need in a memo below the income statement.

Everything You Need To Master Valuation Modeling

Note on ProcessWhen gathering financial data, you should always start with the most recent filings and work backwards, because the latest filings are the most up-to-date. Likewise, in the 10-Q, plus500 review Slack offers a couple additional nuggets. First, under Management’s Discussion and Analysis (MD&A), there’s a section titled “Key Business Metrics,” which reiterates the customer counts.

In conclusion, growth is a fundamental concept in investing that can significantly impact your investment returns. Understanding how a company’s growth prospects influence its stock price is essential for making informed investment decisions. LBO transactions often involve significant debt financing, and one of the primary goals for private equity firms is to reduce the company’s debt burden over time. Since the purchase multiple was 10.0x, we can deduce the sponsor equity contribution was 4.0x LTM EBITDA (i.e. four turns of EBITDA). Multiple compression is an effect that occurs when a company’s earnings increase, but its stock price does not move in response.


Since we’re evaluating a US-listed company (Slack), we’ll go to the SEC’s website to pull the filings. A lot of people are intimidated by the SEC website, due to its slightly clunky interface, but once you get the hang of it, it’s fast and easy. Personally, I feel more comfortable pulling filings directly from the source – and in the US, that’s EDGAR, the SEC’s filings website. Let’s outline the sections we’ll be adding to our historical data tab.

Divestopedia Explains Multiple Expansion

If you look at the prior year’s 10-Q, however, that 10-Q does not include the impact of the deal (since the deal hadn’t happened yet). The one BIG advantage we have as individual investors remains the ability to hold for a long time. Regarding investing, one of the fundamental concepts that can greatly impact your returns is growth. And to learn more about the drivers of LBO returns, check out our LBO value creation article.

The next step is pulling Slack’s historical financial and operating data. Cash and cash-equivalents is obviously cash, and marketable securities should likely be included as well. For restricted cash and strategic investments, we’ll need to read the footnotes to confirm. Every balance sheet should include a cash and cash-equivalents line item under current assets. But we still need to read the rest of the balance sheet to ensure we’re not missing anything. How do we calculate enterprise value for a public company?

In LBOs, the sponsor generally buys a controlling stake in the company. At this point, you’ve learned LBO modeling and how to analyze LBO returns. This section will introduce advanced LBO modeling concepts. Remember it’s important to think critically about both explicit and implicit valuation assumptions. You should now fully understand what mid-year convention is and when and why it’s used.

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