Multiple expansion in PE: levers buyers really pay for

In the private equity world, multiple expansion is often seen as the ultimate value creation lever. While improving EBITDA is a clear path to increasing enterprise value (EV), it’s the expansion of the valuation multiple that can truly supercharge returns. Yet, despite its impact, achieving multiple expansion is often more complex than it seems.

Let’s break it down:

1. What is multiple expansion in private equity?

At its core, multiple expansion happens when a company is sold at a higher EBITDA multiple than it was acquired for. For example, if a PE firm buys a company at 6x EBITDA and exits at 8x, that 2x difference represents multiple expansion—and can dramatically amplify returns.

This matters because it offers non-linear growth. Improving EBITDA from £50m to £70m grows value, but exiting at a higher multiple (say, 8x instead of 6x) nearly doubles the enterprise value from £300m to £560m.

Obviously, the sector trends, exit timing and the market sentiment at the time of the sale are important, as well as several other considerations (such as the synergistic fit with the buyer prepared to pay the higher EBITDA multiple, etc.) But the general principle holds and makes it clear how GPs realise value from their PE portfolio investments.

In short: Multiple expansion compounds growth, making it a game-changer for PE firms.

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2. What drives multiple expansion?

While market dynamics (like interest rates, market timing and sector trends) influence multiples, smart PE firms focus on controllable levers that make a business more attractive to buyers. Here are five proven strategies:

• Diversifying the customer base: Companies overly reliant on a handful of clients are riskier - and investors hate risk. Reducing customer concentration increases stability and appeals to buyers.
  Data Insight: Bain & Company reports that businesses with a balanced customer portfolio see 20-30% higher exit multiples.
  Example: Carlyle Group (Everyday Health) focused on performance marketing strategies, improving customer engagement and valuation.

• Building recurring revenue streams: Predictability is king, while uncertainty is its downturn. Shifting to subscription models, long-term contracts, or service retainers drives more stable cash flows - and higher valuations.
  Fact: SaaS companies with high recurring revenue often trade at 2-3x higher EBITDA multiples than transactional businesses. But high churn rates can offset the benefits if customer retention isn’t prioritised.
  Example: Vista Equity Partners (Marketo) transitioned Marketo to a cloud-based subscription model, significantly increasing its EV before its $1.8 bn sale to Adobe.

• Strengthening ESG positioning: ESG isn’t just PR - it impacts valuation. Companies with strong environmental, social, and governance practices are often seen as lower-risk and future-ready. Firms like EQT, KKR, and TPG achieved higher exit multiples by embedding sustainability into business models.
  Stat: McKinsey found that top ESG performers enjoy a 10% premium on exit multiples.
  Example: KKR exited ERM in 2021, selling a majority stake to Oak Hill and OTPP (Ontario Teachers’ Pension Plan) at a significantly higher valuation due to ERM’s strong ESG positioning. Estimated 3x MOIC (Multiple on Invested Capital), with a higher multiple due to ESG positioning.

• Strategic M&A and bolt-on acquisitions: Acquiring complementary businesses creates synergies and opportunities for multiple arbitrage, where lower-multiple acquisitions are absorbed into the higher-multiple parent company.
  It is expected that achieving M&A synergies can add 1–3x EV, depending on deal size. For example, by centralising platforms across acquisitions, Silver Lake (Dell Technologies) realised significant synergies.

• Tech-enabled growth strategies and strategic exit: Technology-enabled businesses with recurring revenues enjoy higher multiples as opposed to traditional, asset-heavy players. It is assumed that strategies such as transition to SaaS revenue models, robotic process automation, digital marketing optimisation, cloud migration and AI-driven innovation, for example, drive adoption of more efficient processes and make it easier to scale the business up, which in turn is reflected in the higher EBITDA multiple on exit.
  
  For example, Silver Lake (Cegid) used AI to enhance retail and finance software, increasing revenue scalability. And TA Associates (ZoomInfo) used digital marketing to enhance lead generation and sales enablement, significantly boosting EV.

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3. Why is it so hard to expand multiples?

The challenge lies in market perception. Buyers pay higher multiples when they believe a company has:

• Lower operational risk
• Strong growth potential
• Unique competitive advantages

But changing perception isn’t easy. External market shifts, like rising interest rates or sector downturns, can suppress multiples - no matter how well a company performs. Additionally, buyers today are savvier, often discounting “window dressing” tactics and digging deeper into long-term value drivers.

In summary, while the above strategies are powerful, their success hinges on proper execution, sufficient resources, and alignment with the company’s business model, as well as market perception and synergies with the buyer at the time of the exit.

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4. How can PE practitioners engineer multiple expansion?

To consistently drive higher exit multiples, PE firms and business owners should:

1. Think like future buyers: What risks will they see? Mitigate them now. What synergies will the buyer bring (strategic vs. trade buyer)?
2. Invest in quality revenue: Prioritise customer retention, recurring revenues, and market leadership over one-off sales.
3. Focus on strategic positioning: Businesses that dominate niches often command premium multiples.
4. Double down on ESG and governance: Increasingly, buyers factor these into their valuations. For asset heavy industries (electricity, water), for example, expanding into public-private partnerships could enhance long-term sustainability appeal to infrastructure investors.
5. Prepare to overcome regulatory hurdles: Compliance with evolving technology regulations in different jurisdictions needs to be overcome.
6. Manage transitory execution risks: From engaging the right, carefully curated advisors and partners to delivering change and focusing on ROI, these could be difficult to navigate, but the payback is significant if such risks are consistently and professionally mitigated.

In conclusion: While multiple expansion is tough to engineer, it’s far from out of reach. By focusing on the right value levers - those that impact both financials and market perception - PE firms and business owners can turn good deals into great ones.

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If you want to discuss how to avoid leaving value on the table when you you’re your business, please reach out for a confidential chat