How PE Thinks About Valuation

Step 1: Exit Enterprise Value

Exit Enterprise Value = Exit EBITDA × Exit Multiple

Exit Enterprise Value = $75.0m × 8.0x = $600.0m

This is the value the fund expects the whole business (debt and equity together) to fetch on exit, based purely on projected EBITDA and a market multiple — it says nothing yet about what the fund's equity actually walks away with.

Step 2: Exit Equity Value

Exit Equity Value = Exit Enterprise Value − Net Debt at Exit

Exit Equity Value = $600.0m − $90.0m = $510.0m

Net debt is subtracted because debt holders are repaid first; only what's left after the debt is retired belongs to the equity holders. This is the pool of proceeds the fund's equity check is actually being measured against.

Step 3: Required Equity Multiple (MOIC)

Required MOIC = (1 + Target IRR) ^ Holding Period

Where: IRR = annualized return the fund targets, Holding Period = number of years the investment is held before exit.

Using the target IRR (25%) and holding period (5 years):

Required MOIC = (1.25)^5 = 3.05x

MOIC (multiple of invested capital) converts an annual IRR target into a single cash-on-cash multiple over the full hold — it's the number the deal team actually underwrites the entry price against, since IRR alone can't be compared directly to a purchase price.

Step 4: Maximum Equity Check

Maximum Equity Check = Exit Equity Value / Required MOIC

Using the exit equity value ($510.0m) and required MOIC (3.05x):

Maximum Equity Check = $510.0m / 3.05 = $167.1m

This is the largest amount of equity the fund can commit today and still hit its 25% IRR target given the exit assumptions — write a bigger equity check than this, and the same exit proceeds no longer clear the fund's return hurdle.

Step 5: Maximum Entry Multiple

Entry Debt = Entry Leverage × LTM EBITDA = 5.0x × $50.0m = $250.0m

Maximum Entry Enterprise Value = Maximum Equity Check + Entry Debt

Maximum Entry Enterprise Value = $167.1m + $250.0m = $417.1m

Maximum Entry Multiple = Maximum Entry Enterprise Value / LTM EBITDA

Maximum Entry Multiple = $417.1m / $50.0m = 8.34x

This is the ceiling entry multiple: the highest price, expressed as a multiple of LTM EBITDA, the fund can pay today and still clear its target IRR under the assumed leverage, growth, and exit multiple. It's a return-based price ceiling, not a statement of intrinsic value — a DCF or comps analysis could easily produce a different number.

Final Results

• Exit Equity Value: $510.0m
• Required Equity Multiple (MOIC): 3.05x
• Maximum Equity Check: $167.1m
• Maximum Entry Multiple: 8.34x (Maximum Entry Enterprise Value of $417.1m)

The deal team compares this 8.34x ceiling against the seller's asking multiple and against a standalone DCF or comps-based valuation range — if the seller wants more than 8.34x, the fund either walks away, finds more leverage or growth, or accepts a lower IRR.

Would you like to explore how sensitive this maximum multiple is to a change in the exit multiple or the leverage assumption?