Multiple Expansion

An increase in the valuation multiple buyers pay for the same earnings, raising a company's value without any improvement in the business.

Example

A company with 30,000,000 of EBITDA sold at 12x instead of 10x is worth 60,000,000 more.

It largely reflects market conditions, so returns built on it are weak evidence of a manager's skill and may not repeat.

Valuation multiple — A price divided by something the business produces - earnings, cash flow, revenue, subscribers. A compressed way of expressing what buyers paid.
EV/EBITDA — Enterprise value divided by EBITDA - the most common multiple for comparing whole businesses, because both parts are calculated before the effects of borrowing.
Leveraged Buyout (LBO) — The purchase of a company financed largely with debt placed on the acquired company, which repays it from its own cash flow.

Three engines: profit growth, debt paydown and a higher exit multiple — Buyout returns come from growing earnings, using cash flow to repay debt, and selling at a higher valuation multiple - and only the first is reliably within the manager's control. (13 min)
Appraising one fund: where returns came from, and how often deals lost money — A buyout track record is judged by its dispersion, its loss rate and the source of its gains, not by the average multiple. (13 min)