A sensitivity should change your recommendation when a plausible change breaks the conditions you needed to support the investment. Naming the downside without explaining its consequence leaves the decision unfinished.
State the case’s decision rule
For this fictional exercise, entry equity is $100, exit net debt is fixed at $40 solely to isolate two variables, and the committee requires at least 2.0× gross MOIC over five years. That hurdle is an invented case instruction, not a claim about what every fund requires. Ignore fees, dilution and interim distributions.
Equity proceeds equal exit EBITDA × exit multiple − net debt.
| Exit EBITDA | 7× | 8× | 9× |
|---|---|---|---|
| 30 | 1.70× | 2.00× | 2.30× |
| 35 | 2.05× | 2.40× | 2.75× |
| 40 | 2.40× | 2.80× | 3.20× |
At $35 EBITDA and 8×, proceeds are $240 and MOIC is 2.40×. At $30 and 7×, proceeds fall to $170 and MOIC is 1.70×. The low case misses the stated hurdle.
Translate the grid into a question you can investigate
At $30 EBITDA, the minimum multiple for 2.0× is (200 + 40) ÷ 30 = 8×. At 7×, the minimum EBITDA is (200 + 40) ÷ 7 = 34.29.
This exposes two competing requirements: either earnings must remain above approximately $34.3 or the exit multiple must remain at least 8× when earnings fall to $30. Ask which assumption the business evidence can support. Do not call the downside “conservative” without explaining its drivers.
Write a conditional recommendation
Example: “I would not approve at the proposed entry equity without stronger evidence that recurring EBITDA can remain above $34.3 in the 7× exit case. The current base case reaches 2.4×, but the combined downside falls to 1.7×. My next diligence priority is the contract renewal and margin evidence supporting that earnings floor.”
This is stronger than “returns look attractive in most scenarios.” It states a condition and identifies the evidence that could change your view. A lower purchase price could improve returns, but a real financing model must recalculate debt, fees and cash flows rather than adjusting one cell in isolation.
Rebuild the debt path before the final recommendation
Holding exit debt constant is useful for teaching sensitivity mechanics. In a full model, lower EBITDA can reduce cash generation, slow paydown and worsen the downside. Test that linked case before presenting the grid as a complete risk analysis.
Damodaran’s terminal-value discussion explains why exit valuation assumptions need economic support. Our hurdle, inputs and decision rule are fictional.
Use the PE case-study guide to organize the presentation, and the debt-paydown cap example to check the cash bridge. The valuation-methods guide helps separate market-comparison evidence from a cash-flow valuation.