Do you use adjusted EBITDA or pro-forma EBITDA for a plastic surgery roll-up?
I am working on a practice exam involving a physician practice management (PPM) roll-up of plastic surgery clinics. In the CIP, they have adjusted EBITDA as well as this thing they call pro-forma EBITDA, which essentially assumes all the acquisitions they do happen at the beginning of the year.
Given that this is a roll-up strategy, is it reasonable to use the "pro-forma" EBITDA? from a modeling perspective, it also makes it slightly easier for me, since I can assume the practices they add every year, contribute to EBITDA the whole year.
On the other hand, I'm not sure if this is just sell-side BS that I should ignore. Thank you!
PPMs are generally valued off PF Adj. EBITDA. PF is for all acqns they do assuming it happens at the beginning of the year. If they have a de novo strategy, the maturity adjustment is all added to the proforma. Adjustments can be anything to boost EBITDA - tuck-ins under LOI, add back M&A expenses, severance payments etc.
This makes sense! Thank you. It also makes my life easier, from a modeling perspective. One question: how do you typically fund a PPM strategy (or similarly, HVAC roll-ups)? Is it reasonable to draw from the revolver a lot, and not pay back the revolver fully at exit? I don't see how else you finance this type of deal / what's reasonable.
I tried to DM you, but this is a new account and I don't have too many credits :(
You finance it primarily through a delayed draw term loan and secondarily through any cash the business spits off. If you are modelling a large acquisition, you can assume the term loan will be upsized. For roll-ups, you tend not to see deleveraging in the business.
At least for modelling purposes, the general assumption is that the revolver is never drawn. If you draw the revolver, it would certainly need to be repaid at exit.
When would the DDTL occur? Let's say it's a really acquisitive business, would you have like 1 DDTL in year 2, another in year 3, year 4, etc.?
I ask because if you overburden the company with debt from the beginning, the interest expense will be very high.
You can’t just not pay off a revolver lmao. You’ll fund smaller tuck ins through RCF / DDTL capacity, and as the other commenter mentioned, can do an incremental upsize of the TL for larger deals.
Thank you al! Also @amendpretend of course you'll pay off the revolver at exit, since it'll be part of net debt. You're also saying from a lender perspective, the revolver must not be drawn (e.g., fully paid back) before that?
Also, can I ask, when would the DDTL(s) occur? Let's say it's a really acquisitive business, would you have like 1 DDTL in year 2, another in year 3, year 4, etc.?
I ask because if you overburden the company with debt from the beginning, the interest expense will be very high.
Sorry for the super basic questions!!
It may make sense for you to read one of the credit primers online. Getting the debt stack right is critical for PPM roll-ups. But to answer your question, the DDTL is usually negotiated and agreed upon at deal close. You draw from the DDTL only as you close tuck-ins - think of it like a revolver but only for add-ons.
Re: your question on RCF, you can draw and pay it back whenever you like. I find most sponsor backed companies generally avoid drawing on the revolver since you want to use it as a back up for if or when shit hits the fan. Also, if its a cov-lite loan, your lenders might have a springing covenant in place if the revolver is drawn.
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