An exit multiple is a factor used to determine a company’s sale price relative to a financial metric, such as revenue or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Commonly used in startup exits, it helps estimate the potential return for investors by assessing the company’s valuation at exit.
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Why are exit multiples important for investors?
Exit multiples provide a quick way for investors to estimate the potential return on their investment. By applying a multiple to financial metrics, they can assess whether the exit value aligns with their target returns.
How is an exit multiple calculated?
An exit multiple is calculated by dividing the company’s sale price by a key metric like revenue or EBITDA. For example, if a company is sold for $50 million with $10 million in EBITDA, the exit multiple is 5x.
How does an exit multiple benefit founders?
Knowing typical exit multiples for their industry helps founders set realistic expectations for valuation and develop strategies to meet investor return targets.
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