SME HoldCo Buying 70% of an industrial company, how to think about leverage?
Hi,
I am wondering how to think about/model the following situation from a financing perspective for bank negotiations.
I am managing our family HoldCo, focusing on small businesses. We currently have one subsidiary/portfolio company, and are looking to acquire another business (entirely separate from the current portfolio company). We are looking at an opportunity where we would buy 70% of an company, where the previous part-owner/CEO would stay on with the remaining minority stake.
Should I use the traditional LBO-model to look at the debt schedule, but just multiply cash available for debt repayment with 0.7?
As I understand, the debt will be placed on our HoldCo's Balance sheet, and we will need to pay the debt down with dividends from the new business? This way we are only able to use 70% of the available cash flow (simplified).
I am confused as the LBO templates I have looked at have the debt on the balance sheet of the acquired company, and use 100% of the cash flow to pay down debt, even if there is management roll-over? How should I think about this when presenting to our bank?
Thanks for the help and sorry if it is an obvious question!
IMO the entire assets are going to be consolidated and you will have a minority interest. Regarding debt servicing I think it's important to know at which level the debt will sit, if at the SubCo then it will be its responsibility to pay it off.
If at the HoldCo level then the HoldCo will pay it off with its cashflow including the cashflows coming from the 70% stake in the SubCo
Can the 70% owner put the debt on the SubCo level? In that case the whole SubCo pays off the debt of the 70% owner, while the 30% owner just has to comply?
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