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Terminal Value CalculatorDCF / Gordon Growth / Exit Multiple
Use case

LBO Terminal Value

In an LBO model, terminal value almost always comes from the exit multiple. The standard convention is to assume the exit multiple equals the entry multiple, then flex up or down based on a story about multiple expansion or compression.

Direct answer
LBO terminal value at exit equals exit-year EBITDA times the exit EV/EBITDA multiple. Sponsor returns are then computed from the equity-bridge: enterprise value at exit minus net debt at exit equals equity at exit, which compared to sponsor equity at entry produces the MOIC and IRR.
Mechanics

The LBO terminal-value chain

Enterprise value at exit
EVexit = EBITDAexit * (EV / EBITDA)exit
Sponsor equity at exit
Equityexit = EVexit - Net Debtexit
Returns to sponsor
MOIC = Equityexit / Sponsor Equity0; IRR = (MOIC)(1 / years) - 1
Source: Rosenbaum and Pearl, Investment Banking: Valuation, LBOs, M&A and IPOs, 3rd ed., LBO chapterLast verified June 2026.
The convention

Why exit multiple equals entry multiple is the default

Conservatism

Assuming multiple expansion as part of the base case lets the model deliver returns from a market re-rate the sponsor cannot control. Holding the multiple flat forces returns to come from EBITDA growth and deleveraging.

Investment-committee discipline

When the model relies on multiple expansion, the IC will ask why. A flat-multiple assumption keeps the burden of proof on the operating-improvement story.

When to flex

Three legitimate reasons to expand or compress the exit multiple

  • Scale rerate. The company crosses a scale threshold (e.g. from sub-scale to full-scale industry leader) that the comp set rewards with a higher multiple.
  • Mix shift. Revenue mix shifts toward a higher-multiple segment (e.g. from services to software). The exit multiple should reflect the new mix-weighted average.
  • Cycle entry vs exit. Buying at a trough multiple and exiting at a mid-cycle multiple is legitimate if the entry timing was the explicit thesis.
Source: Rosenbaum and Pearl, Investment Banking, 3rd ed.Last verified June 2026.
Related pages

Where to go next

Last verified June 2026. Source: Rosenbaum and Pearl, Investment Banking 3rd ed.