Entry Multiple
An entry multiple is the valuation multiple applied to a company’s financial metric—commonly enterprise value divided by EBITDA—when a private equity investor enters the investment.
How Entry Multiple works
The entry multiple converts an operating metric into a purchase valuation. In buyouts, EV/EBITDA is common because enterprise value captures both debt and equity claims on the business. The multiple paid at entry strongly influences how much operational improvement or exit valuation is needed to reach a target return.
The formula is simple; the denominator is not
Entry EV/EBITDA = acquisition enterprise value ÷ entry EBITDA. The difficult question is which EBITDA belongs in the denominator, especially when sponsors include add-backs, expected synergies or recent acquisitions.
A high entry multiple raises the return hurdle
If operating performance does not improve enough, a high purchase multiple leaves less room for error. Strong returns may then depend on leverage, rapid earnings growth or selling at an equally high or higher exit multiple.
Entry multiple does not equal equity invested
Debt financing can reduce the sponsor’s equity check without changing the enterprise-value multiple paid for the company.
Common misconception: lower entry multiple automatically means bargain
A low multiple can reflect weak growth, cyclicality, customer concentration, capital intensity or other risk. Valuation must be interpreted with business quality.
Entry multiple interacts with leverage and growth
Two sponsors can pay the same 10× EBITDA entry multiple and still underwrite very different investments. One may use conservative leverage and assume strong operating growth; another may use more debt and depend on a favorable exit valuation. The purchase multiple therefore belongs inside a return bridge rather than being judged alone. A useful model shows how much of the expected return comes from EBITDA growth, debt paydown, interim distributions and any assumed change in valuation multiple.
Example
A company with $20 million of EBITDA is acquired for $200 million of enterprise value. The entry multiple is 10.0× EV/EBITDA.
Example
A company with $20 million of EBITDA is acquired for $200 million of enterprise value. The entry multiple is 10.0× EV/EBITDA.
Professional note
Always identify the denominator and EBITDA definition. Reported, adjusted, run-rate and pro forma EBITDA can produce materially different entry multiples for the same purchase price.
Related terms
- Multiple on Invested Capital (MOIC)
Multiple on invested capital (MOIC) is a ratio that compares the value generated by an investment with the capital invested in it.
- Private Equity
Private equity is an investment category in which capital is used to acquire or hold ownership interests in companies that are not publicly traded, or to take public companies private, typically through professionally managed funds.
- Leveraged Buyout (LBO)
A leveraged buyout, or LBO, is an acquisition in which the buyer finances a substantial portion of the purchase price with borrowed money, usually supported by the acquired company’s assets and cash flow.
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