Add-On Acquisitions in an LBO

Step 1: Add-On Purchase Price (Enterprise Value)

Add-On EV = Add-On EBITDA × Add-On Entry Multiple

Add-On EV = $8.0m × 6.0x = $48.0m

This is the price the platform pays to acquire the add-on target, funded entirely with new debt raised at the platform level. Add-ons are almost always priced at a discount to the platform's own multiple — they're smaller, more customer-concentrated, and lack the scale and management depth that justify a premium multiple on their own.

Step 2: Pro Forma Combined EBITDA

Pro Forma EBITDA = Platform EBITDA + Add-On EBITDA + Run-Rate Cost Synergies

Pro Forma EBITDA = $40.0m + $8.0m + $1.5m = $49.5m

Including run-rate synergies here assumes they are realistic and achievable — typically overlapping back-office functions, procurement savings, or shared sales infrastructure. Lenders and investment committees scrutinize this number closely, since overstating synergies inflates the EBITDA base that leverage and covenant tests are measured against.

Step 3: Pro Forma Net Debt and Leverage

Pro Forma Net Debt = Platform Net Debt + Add-On EV

Pro Forma Net Debt = $120.0m + $48.0m = $168.0m

Pro Forma Leverage = Pro Forma Net Debt / Pro Forma EBITDA

Pro Forma Leverage = $168.0m / $49.5m = 3.4x

Financing the add-on entirely with new debt is common in a roll-up strategy because it preserves the sponsor's remaining equity for further deals, but it pushes up platform leverage — here from an implied 3.0x pre-deal to 3.4x pro forma. Sponsors and lenders both track this ratio closely against the credit agreement's leverage covenant, since stacking too many debt-funded add-ons can erode the platform's cushion for a downturn.

Step 4: Value Creation from Multiple Arbitrage

Multiple Arbitrage Value Creation = Add-On EBITDA × (Platform Exit Multiple − Add-On Entry Multiple)

Where: Platform Exit Multiple = the multiple the combined platform is valued at once the add-on is integrated, Add-On Entry Multiple = the multiple actually paid for the add-on.

Using the add-on's EBITDA ($8.0m), the platform's exit multiple (9.0x), and the add-on's entry multiple (6.0x):

Multiple Arbitrage Value Creation = $8.0m × (9.0x − 6.0x) = $8.0m × 3.0x = $24.0m

This is the central economic logic of a buy-and-build strategy: the add-on's EBITDA is purchased at 6.0x but instantly re-rates to the platform's 9.0x once it's folded into a larger, more diversified, better-managed business. That $24.0m is a paper valuation uplift, not cash in hand — it only becomes real value for the sponsor when the combined platform is actually sold or refinanced at that higher multiple.

Final Results

• Add-On Purchase Price (EV): $48.0m
• Pro Forma Combined EBITDA: $49.5m
• Pro Forma Leverage: 3.4x
• Multiple Arbitrage Value Creation: $24.0m

This multiple arbitrage gain compounds with the platform's own organic EBITDA growth and any debt paydown between now and exit to drive the sponsor's overall multiple of money and IRR — add-ons are rarely the headline return driver on their own, but a series of them can meaningfully re-rate the whole platform over a hold period.

Would you like to explore how this value creation changes if the add-on is funded with a mix of debt and platform cash instead of 100% debt?