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Revenue / ARR multiples for entry and exit. Only value exit on EBITDA if you think the company will be / the company has plans to be notably EBITDA positive at the end of your hold period. Buy on revenue sell on EBITDA can be a good way to make money if you know how to do it but it’s a unique operating skillset needed so definitely have a plan if you go that route:
Do you know if you can attach leverage to this business? That's usually why LBO framework doesn't work for companies with negative cash flow. If you know you can raise debt, then the mechanics of the LBO are the same as they are for profitable businesses. Presumably, you expect the company to generate cash flow at some point, or else you wouldn't be investing. Maybe you can monetize certain assets to pay off debt- not sure.
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Potentially can lever the business with an ARR facility if its a SaaS business.
Also can have a PIK only loan, definitely ways to creatively structure debt here, but will be expensive.
I wouldn't change the margins unless you have a strong reason for doing so. Ask what you need to believe for that to happen and if that'd be defensible against an investment committee. Regardless given the negative FCF you would need to set up an account for servicing future interest payments with some of the proceeds. Then you'd need to convince lenders that the cushion from that account is enough with a bunch of restriction covenants and that at time of the term you'd refinance or turnaround the cash profile enough to be in a position to pay back the principal (harder to sell).
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Doesn't sound like a very appetizing situation to invest in.
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There is a strong credit market for growing ARR companies with negative FCF, EBTIDA, and Net Income. I don't swim much in those lanes on the LMM buyout side, but know a couple folks on the credit side who have done ARR deals for UMM deals, down to LMM deals. You will be going to non-bank lenders and the underwriting will take into strong consideration ARR churn and growth, sales/marketing spend, LTV (loan to value, think EV), and path to profitability. Part of the underwriting analysis here is to what extent you can slash sales/marketing and begin putting the contracted revenue in maintenance/service mode. From an interest perspective, sometimes you start with a PIK component out of the gate that turns into cash component when EBITDA becomes positive. Numerous ways to structure these deals
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There is a good Ropes legal alert about these loans floating around “recurring revenue loans” that could be helpful.
I'm sure there are resources out there, but you'll probably only stumble upon it if you know what you are looking for. So yes, makes total sense. It's a pretty neat way of looking at ARR type deals, something that is outside my daily wheelhouse. This is probably too small, but look into Venture debt if you are curious, could be some good learnings if you are spending significant time in the TMT.
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