Question re: LBO debt/equity from non-biz guy
Hey everyone - attorney here with a quick question.
Simplified scenario: Imagine you are acquiring a biz that has 100M revenue and 20M of EBITDA. You are shooting to acquire the biz for 6x EBITDA. Seller is asking for 7x. If you decide to go with 7x, from the perspective of the buyer/investor, how would that change your thoughts on the ratio of debt/equity to fund the purchase price?
Im assuming that the increased purchase price represents an increase in risk, so you may want to decrease the % of equity to account for that increased risk. So you may say at 6x you'll do 40% equity (48M) but at 7x you'll do 30% equity (42M). On the other hand, maybe the % of equity is determined more by the amount of debt you're able to get -- ie, you cover the difference between the purchase price and the banks' commitments.
At a fairly high level, what is the thought process when deciding on the debt/equity split? Is there a hard and fast rule or does it (like most things in life) depend on a number of factors.
Thanks.
In most cases it will come down to how much debt financing you can get without cutting it too close from a cash flow perspective.
deleted
Its pretty simple. The market and bank determine how much debt they're going to give you. So if at most you are going to get 4.0x Debt / EBITDA, the max debt you can get is $80m in your example. You need to get the rest from equity. So if youre paying 7x EBITDA, ie $140m, you need to get $60 million in equity. If youre paying 6x EBITDA, you need $40 million in equity. But perhaps you can get really high mezz debt with 12% interest, or PIK, and then you can raise your debt / ebitda multiple to 5,0x. But whatever the case may be, you are limited on how much equity you need based on your capacity to raise debt.
This is correct. The same applies to lower MM - MM, where "the market" is often a few lenders that you have relationships with who cater specifically to MM.
Quia sit ea consectetur dolorum doloribus eum. Ut nihil voluptatibus nobis doloremque.
Voluptate magnam voluptas explicabo rem ratione libero. Aliquam iusto et aspernatur officiis similique. Maxime et amet ut quidem. Et commodi labore distinctio mollitia laudantium suscipit.
Cum repellendus iste laboriosam id sed sunt excepturi ipsa. Earum ratione dolorem et. Delectus quia quo quam recusandae animi facere. Reiciendis dolor illo voluptate voluptatem. Quia odit officia porro dolores aut et suscipit. Nostrum autem enim at quasi ea.
Qui mollitia consequatur optio et recusandae eveniet. Consequatur voluptates excepturi rerum molestias. Error ut dolor quas vel. Earum nisi rerum delectus modi voluptates. Quos accusantium rerum sapiente dolorem voluptatibus quasi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...