What are common drivers for multiple expansion in an LBO?

In the context of a leveraged buyout (LBO), multiple expansion occurs when the valuation multiple (such as EBITDA multiple) increases, leading to a higher price for the business. The reasons for this often stem from improvements in the company's financial performance or market perception.

EBITDA growth is a significant driver of multiple expansion in an LBO, as stronger earnings can lead to better multiples. Investors often look for evidence that a company is not just stable but growing, which enhances its attractiveness in the market. Additionally, improving market perception can have a profound impact; if investors and market participants believe the company has strong future prospects, they may be willing to pay a higher multiple for its earnings. Factors such as strategic management changes, operational improvements, or successful product launches can all positively influence market perception.

The other aspects mentioned, such as increased market share, higher sales volume, or lower interest rates, while potentially important in different contexts, do not directly correspond to the concept of multiple expansion in the same way EBITDA growth and market perception do. Market perception particularly ties into how investors value the company, leading to expanded multiples. Thus, the combination of EBITDA growth and improving market perception aligns closely with the drivers of multiple expansion in LBO transactions.