How are purchase and exit multiples typically determined in an LBO model?

Purchase and exit multiples in a Leveraged Buyout (LBO) model are typically determined by assessing what comparable companies are trading at. This approach leverages market data to gauge the value that similar companies are attracting in terms of valuation, often measured through metrics such as EBITDA, revenue, or earnings.

Comparables provide a market-backed context for assessing an appropriate entry and exit multiple, which is crucial since it reflects investors' perceptions and the current competitive landscape. By examining how other firms within the same industry are valued, analysts can establish a solid gauge for estimating future performance and the exit value.

While projected future revenues offer insight into projected business growth, they do not directly inform the valuation multiples as comprehensively as current market comparisons. Historical data may reflect past performance but can be stale or not indicative of market trends. Internal company valuations, though valuable for assessing a specific business’s worth, may not incorporate external market sentiments which are critical in determining those multiples. Thus, the assessment of comparable companies’ trading metrics provides the most relevant and actionable data for setting purchase and exit multiples in an LBO context.