In the world of private equity and business investment, there is a phrase that gets used frequently but explained rarely. Multiple arbitrage. It sounds technical, perhaps even a little intimidating. But strip away the jargon and it describes something genuinely intuitive — and once you understand it, you will start to see it everywhere.
At Oros Consultancy, we work with high net worth investors who are intelligent, successful people, but who are not necessarily steeped in the language of corporate finance. So let us explain multiple arbitrage the way it should always have been explained: in plain English, with a real example.
First, what is a "multiple"?
When investors or business buyers value a private company, they typically express that valuation as a multiple of EBITDA — which stands for earnings before interest, tax, depreciation, and amortisation. For our purposes, you can think of EBITDA as a company's annual operating profit, before various accounting adjustments.
If a business generates £500,000 in EBITDA and someone values it at £2.5 million, they have paid a multiple of 5×. If they paid £4 million for the same business, that would be a multiple of 8×.
The multiple reflects how attractive, stable, and scalable the market believes the business to be.
Why small businesses attract low multiples
A single, independent pharmacy is a perfectly good business. It may be well-run, profitable, and trusted in its local community. But from an investor's perspective, it has several characteristics that keep its valuation multiple low.
It is entirely dependent on one location. If a competitor opens nearby, or if there is a difficult year locally, the whole business is affected. It is usually reliant on one owner or manager, with no professional management structure beneath them. And it is small — too small to attract the large institutional buyers who have billions to deploy and need to put significant capital to work at once.
For all of these reasons, small pharmacy businesses tend to change hands at relatively modest multiples — typically in the range of 4× to 6× EBITDA.
Why large groups command premium multiples
Now consider a group of fifty such businesses, professionally integrated under a single brand and management structure. Suddenly the picture looks very different to a potential buyer.
The revenue is diversified across dozens of locations, so no single event can derail the whole enterprise. The group has a professional CEO, CFO, and operational leadership team. It has standardised systems, audited accounts, and a clear growth trajectory. It is, in financial parlance, "institutional grade."
This kind of business is highly attractive to large private equity funds, pension funds, and strategic acquirers such as larger funeral service providers. These buyers are willing to pay significantly higher multiples — often in the range of 10× to 16× EBITDA — precisely because the business has been de-risked, professionalised, and made ready for serious institutional capital.
The maths of multiple arbitrage — a worked example
Let us make this concrete.
Suppose a buy-and-build company acquires ten small pharmacy businesses, each generating £300,000 in EBITDA, at an average multiple of 5×. The total acquisition cost is:
10 × £300,000 × 5 = £15 million
Combined, those ten businesses generate £3 million in EBITDA.
Now suppose the company integrates them, reduces costs through shared resources, and builds a proper management structure. Even if the underlying EBITDA stays exactly the same at £3 million, when the consolidated group is sold as a single entity at a multiple of 12×, the exit valuation is:
£3,000,000 × 12 = £36 million
The group was bought for £15 million in aggregate and sold for £36 million — not because the businesses became dramatically more profitable, but because the act of consolidating them changed how the market values them. That difference — the gap between the buying multiple and the selling multiple — is multiple arbitrage.
In reality, of course, a well-run consolidator will also improve profitability along the way, making the returns even more attractive.
How this translates into investor returns
If you would like to understand more about how this works in practice — including the risks involved and potential opportunities in this space — contact the Oros Consultancy team for an initial consultancy call.
Your capital is at risk. This article does not constitute financial advice.