Leverage multiple is debt divided by EBITDA — the shorthand lenders use for “how heavy is this balance sheet relative to cash earnings.”

How it works

In an LBO, a buyer might finance a company at 5.5x last-twelve-months EBITDA. If EBITDA is $50 million, that implies about $275 million of debt capacity in the structure (before other adjustments). Sponsors add equity for the rest of the purchase price and fees.

Multiples expand in low-rate, stable markets and contract when lenders tighten. Maintenance covenants often require the borrower to stay below a maximum net leverage ratio quarterly.

Why it matters

• Founders: Late-stage debt or PE ownership brings leverage multiples into board conversations. Missed plans can block M&A or dividends until deleveraging.
• Investors: Entry leverage drives equity IRR in buyouts. Underwriting stress cases at +1 turn of leverage shows downside protection.

Net leverage subtracts cash from gross debt before dividing by EBITDA. Sponsors quote both; lenders focus on net when substantial cash sits on the balance sheet.

Add-backs in EBITDA — restructuring costs, stock comp, one-time legal — are negotiated heavily; aggressive add-backs inflate capacity and can breach true leverage covenants later.

Common mistake

Using revenue instead of EBITDA in casual “5x” talk. Lenders mean cash earnings, not top-line growth.

Practical takeaway

When reading sponsor materials, ask whether EBITDA is run-rate adjusted or trailing twelve months and which add-backs are included. Leverage multiples are only comparable when the denominator is defined the same way.

Related ideas

• Leverage
• EBITDA and net debt
• Covenant-lite vs maintenance covenants