A client wants to buy at 12x EBITDA for a business with 5% growth and 15% margins. What's your advice?
A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
On those fundamentals 12x looks expensive, so I'd pressure-test it before endorsing it. A reverse-DCF sense-check: paying 12x for a business growing only ~5% with average margins implies the market/buyer is baking in growth or margin expansion well above what's evidenced — for mature, mid-single-digit growth and unremarkable margins, comparable multiples are typically meaningfully lower (often high-single to low-double digits depending on sector/quality), so I'd benchmark against true comps and what the cash flows actually support. If the fundamentals are genuinely just 5%/15% with no credible upside, I'd advise that 12x destroys value and recommend a lower entry, justified with comps and a DCF. Then explore whether there's a real case for the premium — defensible synergies, a margin-improvement or growth lever the buyer can actually pull, strategic value, or scarcity — and if the seller won't move, bridge the gap with structure (earn-out tied to the growth being paid for) rather than overpaying in cash. And be willing to walk away: discipline beats deal fever. The advice is evidence-based: justify the price with comps, DCF, and a concrete value-creation thesis, or don't pay it.
WHAT INTERVIEWERS LISTEN FOR
- ✓12x looks rich for 5% growth/15% margins — pressure-test with comps and reverse-DCF
- ✓Implied growth/margin in the price likely exceeds the evidence
- ✓Recommend lower entry unless a real synergy/improvement/strategic case exists
- ✓Bridge with an earn-out tied to the growth; be willing to walk away
COMMON MISTAKES
- ✗Endorsing the multiple without comps/DCF check
- ✗Justifying price with stretch/unevidenced synergies
- ✗No walk-away discipline
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