A buyout model that sells for a turn less than it paid looks as if it has taken the optimism out of the exit. The same workbook’s DCF says what the buyer at exit would have to believe, and it is not modest.
The Alder Ridge buyout pays 10.0x 2026 EBITDA and assumes a sale at 9.0x five years later. The lost turn costs 39,599,166 in the returns bridge and reads as prudence. But on the model’s own cash conversion and its own 10 per cent discount rate, 9.0x of 2031 EBITDA is worth paying only if the business then grows at 4.10 per cent a year for ever, against the 2.5 per cent the DCF assumes. At the DCF’s own terminal value the exit is 6.97x, and the sponsor’s 2.35x becomes 1.75x.
The question is not whether 9.0x is a reasonable number to type. It is that the model already contains a second, independent opinion of what the business is worth at the end of 2031, on the same cash flows, and the two opinions differ by 80,249,250 of terminal value. The book’s complete model prints both on the DCF sheet. The returns quoted for the deal use only one of them.
The sponsor buys Alder Ridge at 31 December 2026 for 224,600,000, ten times 22,460,000 of EBITDA, pays 4,492,000 of fees, funds 5,000,000 of minimum cash and borrows 4.5 times EBITDA. The equity cheque is 133,022,000. Five years later 2031 EBITDA is 39,599,166, the cash sweep has taken net debt to 43,175,718, and the exit at 9.0x returns the equity like this:
| Returns bridge, base case | Amount |
|---|---|
| Sponsor equity at entry | 133,022,000 |
| EBITDA growth at the entry multiple | 171,391,656 |
| Multiple change, 10.0x to 9.0x | −39,599,166 |
| Net debt reduction | 52,894,282 |
| Transaction fees | −4,492,000 |
| Exit equity value | 313,216,772 |
The multiple change is the only negative line the sponsor chose. It is there to show that the case does not rely on selling dearer than it bought. That is the usual test of an exit assumption, and 9.0x passes it.
Whoever buys the company in 2031 is paying for the cash it produces after 2031. The DCF sheet values that stream with a perpetuity: 2031 unlevered free cash flow of 20,205,603, grown at 2.5 per cent and discounted at 10 per cent, gives a terminal value of 276,143,241. Divided by 2031 EBITDA of 39,599,166, that is 6.97x.
The ratio can be taken apart. In 2031 the business converts 51.03 per cent of its EBITDA into unlevered free cash flow, after tax, capital expenditure and working capital. A perpetuity pays 1.025 ÷ 0.075 = 13.67 times that cash flow, so it pays 0.5103 × 13.67 = 6.97 times EBITDA. Nothing in that sum is new: every term is on the DCF sheet already.
Run the same perpetuity backwards from 9.0x. An exit value of 356,392,491 on 20,205,603 of cash flow at a 10 per cent discount rate requires perpetual growth of 4.10 per cent. The model’s cross-check computes it in DCF!B32 as (TV × r − FCF) ÷ (TV + FCF).
| Exit multiple | Perpetual growth it implies | Exit equity | Multiple of money | IRR |
|---|---|---|---|---|
| 6.50x | 1.99% | 214,218,858 | 1.61x | 10.0% |
| 6.97x | 2.50% | 232,967,522 | 1.75x | 11.9% |
| 9.00x | 4.10% | 313,216,772 | 2.35x | 18.7% |
| 10.00x | 4.66% | 352,815,938 | 2.65x | 21.5% |
The benchmark for an exit multiple is not the entry multiple. The entry multiple is a price paid for a business still expanding its margin, from 17.0 per cent of revenue in 2026 to 22.2 per cent in 2031. The exit multiple is a price for what is left after that. The DCF itself values the company at 10.27x 2026 EBITDA and 6.97x 2031 EBITDA, a contraction of 3.3 turns on constant assumptions. The deal assumes one.
Each turn of exit multiple is 39,599,166 of exit value, and because the debt at exit does not depend on the price, all of it lands in the equity: 0.30x of multiple of money per turn. Replacing 9.0x with the DCF’s 6.97x removes 80,249,250 from the exit equity. The multiple change line in the bridge becomes −119,848,416 instead of −39,599,166, and the deal returns 1.75x and 11.9 per cent.
That is still a deal that clears the 10 per cent the DCF uses as its cost of capital, but only just. The exit at which the sponsor earns exactly 10 per cent is 6.50x, less than half a turn below the DCF’s own figure. The exit at which the sponsor gets its money back is 4.45x. Nearly all of the distance between a good deal and a merely adequate one sits in a single typed input.
The same gap appears on the valuation side. Valued with a 9.0x terminal value instead of a perpetuity, Alder Ridge is worth 280,448,492 rather than 230,620,021, 49,828,470 more, or 21.6 per cent. At that figure a price of 224,600,000 looks cheap. The DCF prints both enterprise values one above the other and the LBO reads the higher one.
The scenarios move the exit multiple with the economics: 8.0x in the downside, 10.0x in the upside. It is natural to read that as the exit assumption being stressed. Measured by the growth it implies, it barely moves.
| Scenario | Exit multiple | Growth it implies | DCF’s own multiple | Multiple of money | At the DCF’s multiple |
|---|---|---|---|---|---|
| Downside | 8.0x | 4.26% | 6.02x | 0.82x | 0.46x |
| Base | 9.0x | 4.10% | 6.97x | 2.35x | 1.75x |
| Upside | 10.0x | 4.48% | 7.22x | 3.71x | 2.64x |
The downside’s 8.0x implies more perpetual growth than the base case’s 9.0x, because the downside also cuts the cash the business converts. A scenario built to be pessimistic about the company is, at the exit, slightly more optimistic about its future than the base case. On the DCF’s own multiple the downside returns 0.46x rather than 0.82x: it loses more than half the cheque, not 18 per cent of it.
Report the implied growth rate beside the exit multiple, every time, in the same row. A committee can argue about whether 9.0x is achievable without any way of settling it. It can argue about whether a maker of control modules and sensing arrays will grow at 4.10 per cent a year for ever, when the same workbook’s DCF assumes 2.5, and that argument has an answer.
None of this makes 9.0x wrong. Comparable companies may trade there, and a buyer in 2031 may have a lower cost of capital than 10 per cent. But then the model’s WACC or terminal growth is wrong for the DCF, and the two valuations should be made to agree rather than left to disagree by 49,828,470 on the same sheet.
Open Alder_Ridge_Complete_Model.xlsx. Everything above is on three sheets.
When you change B13, the Checks sheet reports FAIL on Scenario comparison matches live results, because the stored LBO results in Scenarios rows 45 to 47 no longer match the live ones. That is the check working: it is the same check that catches the wrong exit debt in the error lab. Put 9 back, or paste the new results as values, and all fourteen checks read PASS again.
Every figure above is a live formula in the free companion files for Financial Modeling from First Principles, which also hold a 693-cell blank build of the same model, an error lab with eight switchable defects and a timed ninety-minute test. Each workbook ends with a checks sheet setting the printed figure beside the computed one. No account and no email address.