Determinants of EBITDA entry multiple pricing in buyout deals

Abstract

Private equity (PE) deal prices have been rising globally. In buyout transactions, PE investors rely on the EV/EBITDA multiple as their primary valuation metric when negotiating the price of a target company. This study aims to improve our understanding of what factors determine such negotiated multiples. Through a study of M&A literature, a long list of potential price determinants is identified. Based on these findings, a multivariate regression analysis of 1.089 global buyout transactions during the period 2010-2018 is performed, showing that investors determine lower multiple bids as target EBITDA’s are larger in size. It is also found that investors determine higher multiple bids when the buyout target has hired a financial advisor. Additionally, results suggest that multiple prices for management buyout transactions and auctioned deals are determined lower and higher respectively, however these results are found insignificant and should therefore be interpreted with care. Due to limited availability of private transaction data, the regression model includes several distant proxies for control variables, limiting the model’s explanatory power. Keywords: Buyout pricing, Private equity, Mergers & acquisitions (M&A), Price determinants, EV/EBITDA multiple, EBITDA size, Target expertise, Management buyout (MBO), Auctioned deals.