Four stress tests
A single base-case chain (Lesson 22) is never enough, the useful question is what happens to the whole thing when one assumption breaks. Four stress tests worth running on every deal:
- Growth slows: if Meridian's growth halves, EBITDA at exit is lower, and every downstream number in Lesson 22's chain shrinks with it.
- NRR falls: recall Lesson 12's stress test, if 118% NRR (earned growth) becomes 95% (customers leaving faster than they expand), the growth assumption feeding the whole model needs rebuilding from scratch, not just trimming.
- Margins deteriorate: if EBITDA margin slips from 20% to 15% on the same revenue, free cash flow (Lesson 17) shrinks, which slows debt paydown (Lesson 16), a second-order hit on top of the direct EBITDA hit.
- Exit multiple contracts: Lesson 19's mechanism, even a fully on-plan operating performance can still underperform if the market simply pays less for the same EBITDA at exit.
A deal worth doing has to survive a combination of these, not just each one in isolation.
| EBITDA CAGR \ Exit multiple | 6x | 7x | 8x | 9x | 10x |
|---|---|---|---|---|---|
| 2% (growth slows badly) | 4% | 8% | 11% | 13% | 15% |
| 5% (growth halves) | 9% | 12% | 15% | 17% | 19% |
| 7% (plan case) | 13% | 16% | 18% | 21% | 23% |
| 10% (growth beats plan) | 17% | 20% | 23% | 25% | 28% |
Checkpoint
- Downside scenarios: test the investment case's fragility, one assumption at a time and in combination.
- NRR deterioration: is worth watching specially: it doesn't just slow growth, it can flip earned growth into a business that's shrinking underneath its topline.
If anything here still feels unclear, ask before moving to Lesson 24.