What is 'multiple arbitrage', and how does it work in Buy-and-Build strategies?
Multiple arbitrage in Buy-and-Build means buying smaller add-ons at lower multiples (typically 6–7x EBITDA) and selling the platform at a higher multiple (10–12x). It contributes 30–40% of Buy-and-Build returns.
Platform acquisition at 9.0x EBITDA. Add-ons at 6.0–6.5x. Effective platform multiple on aggregation: ~7.9x. At a Year 5 exit the larger platform sells at 11.0x — a multiple pickup of around 3.1x, which on $33–$50m of EBITDA means several hundred million of EV.
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| Line | Platform | Add-on 1 | Add-on 2 | Aggregate |
|---|---|---|---|---|
| EBITDA | $20m | $5m | $8m | $33m |
| Multiple | 9.0x | 6.0x | 6.5x | – |
| EV | $180m | $30m | $52m | $262m |
| Effective multiple | – | – | – | 7.9x |
At exit after 5 years: EBITDA $50m (organic + synergies), multiple 11x → Exit EV $550m.
| Component | Effect | % of total |
|---|---|---|
| EBITDA growth ($33 → $50m) | +$136m | ~30% |
| Multiple expansion (7.9x → 11x) | +$153m | ~35% |
| De-leveraging | +$160m | ~35% |
- Add-on multiples are often estimated too optimistically: smaller companies command premium multiples once strategic buyers are competing.
- Integration costs are underestimated and eat into the multiple-arbitrage advantage.
Often used in a pitch: "We buy add-ons at 6–7x and integrate them onto the platform at 9x — multiple arbitrage of 2–3x per add-on." Seniors test this with "What if synergies aren't fully realized?" Answer: "Sensitivity test at 50% synergy realization — multiple arbitrage falls to 1.5–2x. Always show the worst case in the IC memo."