Entry and Exit Multiple

Step 1: Entry Enterprise Value and Entry Equity Investment

Entry Enterprise Value = $50m × 8.0x = $400m

Entry Debt = 5.0x × $50m = $250m

Entry Equity Investment = $400m − $250m = $150m

The entry multiple is the price the sponsor pays for the business, expressed as a multiple of its current cash-flow proxy (EBITDA). It fixes the total enterprise value on day one; how much debt can be raised against the business and how large the sponsor's equity check has to be both flow directly from this single number. Paying one turn less at entry (7.0x instead of 8.0x) would have reduced the equity check by $50m before the business has done anything operationally — which is why disciplined entry pricing is treated as its own value creation lever, not just a starting condition.

Step 2: Exit Enterprise Value Under Each Multiple Scenario

Applying the same EBITDA × Multiple formula to the Year 5 EBITDA of $65m under each exit-multiple assumption:

Exit enterprise value uses the identical formula as entry, but the multiple applied at exit isn't the sponsor's choice — it's set by whatever buyers (strategic acquirers, other sponsors, or public markets) are willing to pay for similar businesses five years from now. The $130m spread between the contraction and expansion scenarios comes entirely from the multiple assumption; EBITDA is held constant at $65m across all three columns. This is exactly why interviewers probe exit multiple assumptions so hard — an underwriting model can quietly bake in several turns of unearned "expansion" that has nothing to do with operational performance.

Step 3: Exit Equity Value, MoM, and IRR

Subtracting the $150m of net debt remaining at exit (after five years of scheduled amortization from the $250m entry balance) and dividing by the $150m entry equity check:

MoM (Multiple of Money) is simply exit equity proceeds divided by the equity originally invested — a time-agnostic measure of how many dollars came back per dollar in. IRR annualizes that same result over the holding period, which is why it's the metric LPs actually use to compare funds with different hold lengths. Because net debt is fixed across all three scenarios, every dollar of enterprise-value swing from the multiple flows straight through to equity — that's the mechanical reason a two-turn multiple swing (7.0x to 9.0x) produces roughly an 8.5-percentage-point IRR swing (15.2% to 23.7%) on an unchanged operating business.

Step 4: Isolating the Multiple Expansion Contribution

Multiple Expansion Contribution = (9.0x − 8.0x) × $65m = $65m

Relative to the flat-multiple baseline ($520m exit enterprise value, $370m exit equity), the expansion scenario's extra $65m of enterprise value flows entirely to equity dollar-for-dollar, since the debt balance doesn't change. That $65m represents roughly $65m / $435m ≈ 14.9% (0.149) of the total exit equity value in the expansion scenario — meaning about one-seventh of that scenario's total equity value came purely from the market re-rating the business, not from the $15m of EBITDA growth ($50m to $65m) the sponsor actually delivered operationally. This decomposition — separating returns into an EBITDA-growth component, a multiple component, and a deleveraging component — is the logic behind a full value creation bridge, and it's exactly what interviewers are testing when they ask "where did the returns actually come from?"

Final Results

• Entry Equity Investment: $150m
• Flat-Multiple Exit MoM / IRR: 2.47x / 19.8%
• IRR Swing from Exit Multiple Alone (7.0x–9.0x): ~8.5 percentage points
• Multiple Expansion Contribution (Expansion Scenario): $65m (~14.9% of exit equity value)

This same three-way split — EBITDA growth, multiple change, and debt paydown — is what a full value creation bridge quantifies across an entire deal, and it's the framework sponsors use internally to judge whether a fund's returns were earned operationally or simply inherited from favorable market timing.

Would you like to work through how this decomposition changes when EBITDA growth and multiple expansion happen simultaneously, including the cross-term between them?