How do we try to figure out leverage turns for businesses with negative EBITDA? Should we be making adjustments like adding-back SBC or saying we will cut down headcount? If so, what % of that can we assume?
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For businesses with negative EBITDA, determining leverage turns requires a more nuanced approach since traditional EBITDA-based metrics don't apply directly. Based on the most helpful WSO content, here’s how you can approach it:
Revenue-Based Leverage:
Adjustments to EBITDA:
Equity Cushion and LTV:
Focus on Growth Metrics:
In summary, while adjustments like adding back SBC or cutting headcount can help normalize EBITDA, the key is to ensure these adjustments are realistic and supported by the business's operational and financial outlook. Additionally, revenue-based leverage and equity cushions are often used as alternative metrics for businesses with negative EBITDA.
Sources: SaaS LBO, Got this task during an Private Equity internship interview, how to handle it?, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, 21 Finance Interview Questions and Answers
Yes make standard adjustments which market terms of a credit agreement would permit.
Other than that you’re screwed buddy adios
see you down at the ol chapter eleven courthouse!
Ignore above. You'll just lever off ARR or revenue instead (typically 1-2x). Depending on the credit agreement, you may be able to maintain revenue-based leverage for the term of the loan OR "flip" to an EBITDA-based construct upon hitting certain time or performance milestones.
For the sake of a case study, fine to assume the former.
Got it, should I just assume something like 1.5x for the sake of the case study / to be a bit conservative compared to the 2x max. How do I actually reasonably defend that in the debrief? Also would love any general advice on software case studies for associate recruiting. Thank you!
I’d actually just model 1x for conservatism as 1.5-2x is moreso an outlier depending on combo of macro climate and asset quality.
You can just justify 1x as industry norm for a medium quality, growing (hence unprofitable) business with recurring revenue / software.
Would echo this and to make it really simple; just do greater of 6x Adj LTM EBITDA (can add back Rx charges or other one-time expenses as LevFin would do) or revenue 1x revenue for these case studies. FYI, typicallly it's the EBITDA number. Although 1x revenue is not uncommon, think it's much easier to justify EBITDA multiples in convo.
Do not worry about specific numbers, just try to be semi-reasonable; everyone knows you don't have all the info or time with the capital structure or interest rates. I would try to simplify the case as much as possible; just use a % number instead of SOFR spread and do not complicate things for yourself by adding PIK ir seller notes.
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