How do you pick purchase multiples and exit multiples in an LBO model?

• A. Look at comparable companies and see where they trade
• B. Look at similar LBO transactions and their multiples
• C. Show a range of multiples using sensitivity analysis
• D. Use a random guess without data

Answer: (D)

In an LBO model, multiples should come from data, not guesswork. You anchor the purchase multiple by looking at market evidence—comparable companies and precedent transactions for similar deals—and adjust for the target’s risk, quality, growth prospects, and the level of leverage you plan to use. For the exit multiple, you estimate what the market could pay at exit based on similar recent exits and the expected market environment, then test how results look across a range of plausible outcomes. Practically, analysts present a spectrum of multiples and run sensitivity analysis to show how IRR, cash-on-ccash, and equity value shift under different buy and sell scenarios. Relying on a random guess ignores data, misprices risk, and can lead to unrealistic financing and return outcomes.