Case 057Screening and ranking businessesHard
How much would you pay for a school group? EBITDA Rs 90 crore growing 10%, 4.5x debt, a 11x exit in year 5, and a fund that needs 22%. Find the maximum entry multiple.
1The situation
Varenya Education runs 22 K-12 schools under one brand. EBITDA is Rs 90 crore and has grown 10% a year through fee increases and two new campuses, which the plan continues. Lenders will provide 4.5x EBITDA, Rs 405 crore, at 10%. Cash conversion before interest is 50% of EBITDA after capex, tax and working capital, and all cash after interest repays debt.
Comparable school groups have changed hands at 11x, and the fund assumes an 11x exit at the end of year 5. The fund will not sign a deal below a 22% IRR.
2Your task
What is the maximum entry multiple the fund can pay and still earn 22%, how sensitive is that ceiling to the exit multiple and the target, and what would you actually bid?
Quick check
The exit is assumed at 11x. Does that mean the fund can pay about 11x and still earn its return?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About 9.9x EBITDA, an enterprise value near Rs 888 crore. Exit equity is fixed by the plan: EBITDA of Rs 145 crore at 11x is Rs 1,594 crore, less Rs 290 crore of debt left after Rs 115 crore of paydown, Rs 1,305 crore. A 22% IRR over five years is 2.70x, so entry equity can be at most Rs 483 crore. Add the Rs 405 crore of debt and divide by Rs 90 crore. Bid below the ceiling, because every input in it is a forecast.
Step 1Why do you solve backwards from the exit rather than forwards from a price?
Because the exit does not depend on what you pay, and the question is the price. Think of bidding at a flat auction when you know what the flat will rent for and the return you need: you work out the most you can bid, then bid less. Debt is set by lenders at 4.5x, so Rs 405 crore, and the paydown depends only on EBITDA and interest, so exit equity is the same whatever the entry multiple: Rs 1,305 crore. The entry multiple only changes the equity cheque, and the equity cheque is what the 22% is earned on.
| Year | EBITDA | Cash before interest | Interest | Debt repaid | Debt at year end |
|---|---|---|---|---|---|
| 1 | 99.0 | 49.5 | 40.5 | 9.0 | 396.0 |
| 2 | 108.9 | 54.5 | 39.6 | 14.9 | 381.1 |
| 3 | 119.8 | 59.9 | 38.1 | 21.8 | 359.4 |
| 4 | 131.8 | 65.9 | 35.9 | 29.9 | 329.4 |
| 5 | 144.9 | 72.5 | 32.9 | 39.5 | 289.9 |
| Total | 187.1 | 115.1 | 289.9 |
Step 2How do you turn 22% into a price?
Compound the target, divide, add the debt. 1.22 to the fifth power is 2.70, so entry equity can be at most Rs 1,305 crore over 2.70, Rs 483 crore; with Rs 405 crore of debt the enterprise value is Rs 888 crore, 9.86x EBITDA. On paper, use the rule that 2.7x in five years is about 22%, which is why many funds quote a target multiple rather than an IRR. Every turn you pay above the ceiling costs about Rs 90 crore of equity and roughly four points of IRR.
| 1,305 | exit equity: 11x EBITDA of 145 less 290 of debt remaining |
| 1.22^5 | the growth factor a 22% IRR needs over five years, 2.70 |
| 405 | debt the lenders provide at entry, 4.5x EBITDA |
Step 3How much of the ceiling is the exit assumption?
Most of it, which is the uncomfortable truth to say out loud. At a 10x exit the ceiling drops to 9.3x; at 12x it rises to 10.5x; each turn of exit multiple is worth about a turn of entry multiple, because exit EBITDA is 1.61 times entry EBITDA and the discounting roughly cancels it. Raising the target to 25% removes about half a turn. The grid is what the investment committee will ask for, so bring it rather than a single number, and point to the cell you believe.
Step 4What would you actually bid, and why?
Below the ceiling, with a reason. Bid around 9x, Rs 810 crore, which earns about 26% on the plan and still clears 22% if the exit slips to 10x. A bid at the ceiling earns the target only if every input holds: 10% growth for five years, 50% conversion, lenders at 4.5x, and a buyer at 11x in a year you cannot see. The margin of safetyThe gap between the most you could pay and what you do pay, which absorbs forecasts that turn out wrong. is the difference between the ceiling and the bid, and the interviewer wants to hear you choose it rather than default to the maximum.
Where candidates lose it
The usual loss is solving for the entry multiple with the debt also scaling: 4.5x of EBITDA is fixed by lenders at Rs 405 crore, so paying more means more equity, not more debt. Letting debt rise with price makes the ceiling look higher than it is.
The second miss is quoting the ceiling as the bid. The ceiling is where the return target is just met if everything goes to plan; the bid should sit below it, and the interviewer wants to hear how far and why.
What the interviewer asks next
- Lenders cut leverage to 3.5x. What happens to the ceiling?
- Growth is 10% for three years and then 5%. Rework the exit equity and the ceiling.
- How would a 2% management fee and 20% carry change the price the fund can pay to deliver 22% net to its investors?
- Why might a strategic buyer of schools pay 12x when the fund's ceiling is under 10x?
Asked at KKR, Mergers and Acquisitions, London, 2025 (Wall Street Oasis): How much would you pay for the business and why
Company names and figures are illustrative.