Which metric is commonly used at exit to estimate equity returns in an LBO?

Which metric is commonly used at exit to estimate equity returns in an LBO?

• A. Net income
• B. Free cash flow to equity
• C. EBITDA exit multiple
• D. Revenue growth

Answer: (C)

In an LBO, exit valuation is typically anchored to an EBITDA multiple because it ties the sale value to a standardized measure of operating performance that market participants use for comparables. EBITDA acts as a proxy for ongoing cash-generating ability, relatively insulated from financing and non-cash charges, making it a stable basis for pricing the business at exit. The exit enterprise value is computed as exit EBITDA times the chosen multiple, then net debt is subtracted to arrive at equity value. That equity value is what determines the return to equity holders. Net income, while important for profitability, is heavily influenced by interest, taxes, and non-cash items, which can distort the sale price. Revenue growth alone reflects top-line expansion but doesn’t directly translate into a market price at exit. Free cash flow to equity can be informative, but exit pricing is conventionally based on enterprise value multiples rather than a cash-flow metric that already accounts for financing.

In an LBO, exit valuation is typically anchored to an EBITDA multiple because it ties the sale value to a standardized measure of operating performance that market participants use for comparables. EBITDA acts as a proxy for ongoing cash-generating ability, relatively insulated from financing and non-cash charges, making it a stable basis for pricing the business at exit. The exit enterprise value is computed as exit EBITDA times the chosen multiple, then net debt is subtracted to arrive at equity value. That equity value is what determines the return to equity holders.

Net income, while important for profitability, is heavily influenced by interest, taxes, and non-cash items, which can distort the sale price. Revenue growth alone reflects top-line expansion but doesn’t directly translate into a market price at exit. Free cash flow to equity can be informative, but exit pricing is conventionally based on enterprise value multiples rather than a cash-flow metric that already accounts for financing.