Case 043Returns attribution and value creationHard
Buy-and-build: a vet clinic platform with Rs 40 crore of EBITDA is bought at 12x, six bolt-ons of Rs 5 crore EBITDA each are bought at 6x, integration costs Rs 15 crore, and the group exits at 12x in year 5 with 8% organic growth. Split exit value into organic growth, acquired EBITDA and multiple arbitrage.
1The situation
Sukhmani Veterinary Clinics runs a chain of pet clinics with in-house diagnostics and pharmacy across three cities. A sponsor buys it at 12x EBITDA of Rs 40 crore, Rs 480 crore. The plan is to buy 6 smaller clinic groups, each earning Rs 5 crore of EBITDA, at 6x, Rs 30 crore each: two at the end of year 1, two at the end of year 2, two at the end of year 3. Bringing them onto one brand, booking system and supplier contract costs Rs 15 crore in total.
Every clinic, old or acquired, grows EBITDA 8% a year from the date it is owned. The sponsor sells at the end of year 5 at 12x. Ignore debt; the question is where the enterprise value comes from.
2Your task
What is the exit value, how much of it comes from organic growth, from the acquired EBITDA and from multiple arbitrage, and when is the arbitrage real?
Quick check
Six bolt-ons bought at 6x for Rs 180 crore are worth 12x inside the group. How much value does that multiple gap alone create?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Exit value is about Rs 1,160 crore on Rs 96.6 crore of EBITDA, 1.72x the Rs 675 crore put in. Beyond the Rs 480 crore platform and Rs 180 crore paid for bolt-ons, organic growth adds about Rs 320 crore and multiple arbitrage Rs 180 crore. The arbitrage is real only if the exit buyer pays 12x for the acquired clinics; at 8x it shrinks to Rs 60 crore and the return to 1.49x.
Step 1How much EBITDA does the group have at exit?
Grow each piece from the day it is owned. The platform's Rs 40 crore grows five years at 8% to Rs 58.8 crore; the bolt-ons grow for four, three and two years after purchase, so Rs 30 crore of acquired EBITDA becomes Rs 37.9 crore. Group EBITDA at exit is Rs 96.6 crore, and at 12x the group is worth Rs 1,160 crore. Against it, the sponsor put in Rs 480 crore for the platform, Rs 180 crore for the clinics and Rs 15 crore to integrate them: Rs 675 crore.
Step 2Where does the exit value come from?
Split it in five so each engine has its own number. A kirana owner who buys three small shops cheaply because they are run badly, puts them under her own name and supplier terms, and then sells the whole chain to a supermarket has made money three ways: her own shop grew, the bought shops grew, and the supermarket paid her chain's price for shops she bought at a corner-shop price. Here the platform at its entry value is Rs 480 crore, its organic growth adds Rs 225 crore, the bolt-ons at their purchase price are Rs 180 crore, the multiple arbitrageBuying earnings at a lower multiple than the one at which they are later sold, so value appears without the business changing. on them adds Rs 180 crore and their growth after purchase adds Rs 94 crore.
| Source of exit value | How it is worked | Rs crore |
|---|---|---|
| Platform at entry value | 12 x 40 | 480 |
| Platform organic growth | 12 x (58.8 - 40) | 225 |
| Bolt-ons at the price paid | 6 x 30 | 180 |
| Multiple arbitrage | (12 - 6) x 30 | 180 |
| Bolt-on growth after purchase | 12 x (37.9 - 30) | 94 |
| Exit value | 12 x 96.6 | 1,160 |
Step 3When is the arbitrage real?
Only if the buyer at exit pays the platform's multiple for the acquired clinics. A buyer pays 12x for a group with one brand, one booking system, shared diagnostics and proven same-clinic growth; if the six acquired groups still run as separate clinics with their own systems, a buyer will value them closer to what they cost. At 8x for the acquired EBITDA, exit value falls to Rs 1,008 crore, the arbitrage shrinks from Rs 180 crore to Rs 60 crore and the return on capital from 1.72x to 1.49x. The Rs 15 crore of integration spend is what turns six clinics into part of the platform, so it is the cheapest line in the plan and the one diligence should test hardest.
Say the limits. The case ignores the debt that would fund the bolt-ons, which would raise the equity return, and assumes six sellers can be found at 6x when every rival sponsor is running the same playbook; in a crowded sector the bolt-on price drifts up and the arbitrage with it. The view: a credible plan if the integration is proven on the first two clinics before the next four are bought, and an expensive one if the exit thesis needs 12x for clinics the group never really absorbed.
Where candidates lose it
The usual loss is booking the whole 12x on acquired EBITDA as value creation, Rs 360 crore, instead of the Rs 180 crore gap over the price paid. The interviewer is checking whether you subtract what the clinics cost.
The second miss is treating arbitrage as automatic. It appears only if the exit buyer pays the platform multiple, which depends on the integration being real.
What the interviewer asks next
- The sponsor funds the bolt-ons with debt at 10%. How does that change the equity return?
- Two of the six sellers want 9x. Is it still worth buying them?
- How would you prove to an exit buyer that the acquired clinics deserve the platform multiple?
Company names and figures are illustrative.