How do you handle negative multiple compression in the disaggregation bridge?
Multiple compression is when the exit multiple is lower than the entry multiple. It eats into returns even if EBITDA has grown over the hold period.
Year 0 EBITDA $50m × 9x = $450m EV. Year 5 EBITDA $65m × 7.5x = $487.5m EV. EBITDA rose 30%, EV only 8.3%.
EBITDA growth at a stable multiple would have added +$135m EV. Multiple compression (9 → 7.5x at $65m EBITDA) eats −$97.5m of that away. Net +$37.5m EV — compression eats 72% of the operating value creation.
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| Situation | Effect |
|---|---|
| Sector sentiment shift | −1.0 to −2.0x |
| Bear market phase | −0.5 to −1.0x |
| Sector-specific crises | −1.5 to −3.0x |
| Company-specific issues | −1.0 to −2.0x |
- Aggressive EBITDA growth: over-compensate for the multiple drop.
- Accelerate de-leveraging: build equity from paydown rather than from the multiple.
- Extend the hold: wait for a better market, possibly via a continuation vehicle.
multiple expansion gets set as an implicit assumption in the model, while compression is forgotten as a stress scenario. In sector phase shifts (e.g. SaaS 2021 → 2023), 1.5–2.0x of compression has realistically occurred.
Question: "How would you handle 1.5x of multiple compression?"
Answer: "Stress-test it in the IC memo. At −1.5x compression on $50m EBITDA I lose $75m of EV. That calls for compensating EBITDA growth or an extended hold. Modeling best practice: show three cases and test multiple compression as a sensitivity in each"