What is an entry multiple?
The entry multiple is the valuation multiple a buyer pays to acquire a company — the purchase enterprise value divided by a measure of earnings, most commonly EBITDA. A business bought for an enterprise value of $200m on $25m of EBITDA is bought at an 8x entry multiple.
It is the single most important price the deal will ever set, because every component of the return is measured relative to it. Pay 8x and exit at 11x and you have multiple expansion; pay 12x and exit at 10x and growth has to work hard just to break even. The entry multiple is the basis from which the whole model runs.
The denominator matters as much as the number. An 8x multiple on real, sustainable EBITDA is a different deal from 8x on a figure padded with optimistic add-backs. Entry multiples are only comparable when the earnings base underneath them is defined the same way.
How the entry multiple shapes a deal
The entry multiple does heavy work in an LBO model:
- It sets the purchase price. Multiple times the agreed earnings base gives enterprise value, the starting point for sources and uses.
- It anchors the exit assumption. Most models assume an exit multiple at or below entry, so a high entry multiple raises the bar the business must clear to deliver a target return.
- It interacts with leverage. A higher entry multiple usually means more equity in the deal, since lenders size debt off cash flow, not off the price paid — diluting the equity return.
- It is benchmarked against comps. Buyers test the entry multiple against comparable companies and precedent transactions to judge whether they are paying a fair, full, or excessive price.
Discipline on entry is the cheapest form of return there is: every turn paid at entry is a turn the business has to earn back before the deal is even at par.
Entry multiple versus exit multiple
The entry multiple is fixed and known — it is the price you negotiated and paid. The exit multiple is uncertain until you sell, set by the next buyer and the market at that moment. The relationship between the two is one of the three classic return levers, alongside earnings growth and debt paydown.
The conservative convention is to underwrite an exit multiple no higher than the entry multiple, so the deal does not depend on a re-rating it cannot control. A model that only works because it assumes the exit multiple is higher than entry is leaning on the riskiest assumption in the whole analysis.