Exit Multiple and LBO Valuation: Solve Purchase Price from Target IRR

From operating earnings to exit equity

Use an enterprise-level earnings metric with an enterprise-value multiple. With EBITDA, terminal enterprise value equals final-year EBITDA times the exit EV/EBITDA multiple. Deduct exit debt and add eligible cash to reach equity value; account for other claims and exit costs if applicable.

Exit EV = Exit EBITDA × Exit EV/EBITDA multiple
Exit equity = Exit EV − Exit debt + Exit cash − other claims

Solve the investor’s entry investment

For a single initial investment and a single exit receipt, discount exit equity proceeds at the target IRR. Interim dividends require a full cash-flow series. Management participation or preferred equity means sponsor proceeds may be less than total equity proceeds.

Maximum initial equity = Exit equity proceeds / (1 + target IRR)^hold years
Entry EV = Initial equity + Entry debt − Entry cash − transaction fees

Worked example: a 20% return hurdle

Assume exit EBITDA of $15m and an 8.0x exit multiple: exit EV is $120m. With $30m exit debt and $5m cash, exit equity is $95m. Over five years at a 20% target IRR, the maximum initial equity investment is $95m / 1.2⁵ = $38.18m.

If entry debt is $50m, entry cash is zero and fees are $3m funded with equity, the maximum entry EV is $85.18m. This simplified example assumes no dividends, management participation or additional financing.

Why purchase price often needs a solver

When debt is sized as a percentage of purchase price, changing the price also changes debt, interest, cash sweep and exit net debt. Those changes feed back into the affordable price. Re-run the complete forecast and financing schedule until the price converges.

Interpret the output correctly

A target-return purchase price is not the same concept as an intrinsic DCF enterprise value. It reflects the selected leverage, holding period and equity hurdle. In diophos, the Summary and Sensitivity views expose maximum purchase price and investor returns. Compare like-for-like value bases on the football field.