Capital Structure for Private Acquisitions Under $20M?

Thanks for the reply!

I should clarify by the way that I'm not completely green to M&A, although I do appreciate you taking the time to write things up!

Going through your responses:

1. I have access to a few M&A guys, but most of them are mid-market, and I don't really know anyone specialized in the $10M - $20M range. I haven't looked too hard either.

2. Always.

3. Yep.

4. Yes, very aware of this as a CPG/consumer brands guy. When I invest in a co. I'm usually doing so for the reputation/reviews/brand + cash flow as CPG/consumer brands rarely have unique technology.

5. Yes. I've been working 80 - 100 hours a week since I was 18 and love it solely because I always pick cool people to work with. If you can't have fun while you work then you'll get burned out way too fast.

6. Agreed.

Re: other points:

1. Looking at consumer brands most of the time so EBITDA really seems like the way to go.

2. Agreed with simple & sensible. Any idea who I could speak to in order to better understand just how much debt I should be able to raise? There seems to be a lot of information floating around for bigger mid-market co's but nothing lower really. On the bottom end the only options seems to be SBA backed loans (1M - 5M transaction sizes).

3. Yes, it's a tricky balance. My general philosophy in business is never to pay unless I'm getting results and it's worked out really well. I think motivating A-players with my track record should work well and maybe offering more back-end comp.

4. Thanks!

Yes, I don't want them too focused on M&A which is why I'm the one dealing with it. None of the companies are really big enough to justify an in-house banker unfortunately.

Thanks for the offer re: board, but it doesn't really make sense for companies our size as they are so early stage!

oldrow:

There probably is a really good and/or long list somewhere on the internet but these are the few principles I can think of that are important to know.

Key principles:

1) Use an M&A expert for advice. A bad acquisition is an easy thing to fumble up, and could ruin the business. Have them guide you through the process, especially if it’s your first time or if there is little margin for error.

2) Ask your M&A expert questions on things you are unsure of, even if you think asking it sounds stupid.

3) Use a due diligence list when making an acquisition. We all forget things, especially if we’re busy doing other things like running a business.

4) Think about the soft things like reputational risk before buying the company. It’s not all about the numbers.

5) Find and work with people easy to work with. Whether it’s your advisers on a M&A transaction or the employee of the company you’re buying.

6) Don’t over-complicate the deal with fancy deal structures or superfluous legal paperwork. The M&A process is already completed as is.

There are key terms and valuation techniques I would encourage senior members to get to know and understand and can be found on any M&A-orientated website. These are important because in an ideal world management should be able run the origination and screening of deals for themselves before a potential deal reaches board for a proper vote to conduct further DD. I’m assuming you’re doing this already but management should be running through the industry conferences circuit: meeting advisors (tax, legal, financial, etc.), sizing up potential acquisitions and partnerships, and keeping up with trends in the industry. For answers to your questions see below:

1) For as long as companies have been bought and sold: EV to Rev and EV to EBITDA still remain the most common, even at the smaller end of the market. You may also see more creative valuation metrics based on an industry KPI. EV to Subscribers for a subscription/membership model makes sense as does a EV to EBITDARent multiple for a retail business. It’s important to note that these multiples are more complimentary to the overall valuation process than pure stand-alone valuations.

2) Rather than look to what is typical, structure the deal for the best return and what the company is capable of handling. A simple and straightforward capital structure works best, aiming to keep the number of debt lenders to a minimum. As you may know debt capacity can be determined by things like gearing ratios, coverage ratios, and cash flow expectations. Debt for companies under the $10M EBITDA mark are levered less than 3.5x and the mix is mostly weighted to senior debt. Unitranche is becoming more popular in the middle market, but it has its own pros and cons to consider.

3) Yes, banks and business brokers focusing on the lower middle market / growth & venture stages are the go-to. On fee structure - I don’t know about most. Some will work off pure commission especially if follow-on deals are agreed to, and some simply won’t. For those that insist on a retainer, there are ways to minimize or pay this fee as well. All in all, I think you get what you pay for, but keep in mind everything can be negotiated and don’t go with the first banker you meet.

Source additional equity – yes

4) You would want to look for “lower middle market”. I don’t have a specific site to recommend that can act as an inclusive resource, but I would take a look at what some M&A advisers publish on their websites, as many of them have primers, pamphlets, and other reading material for business owners.

All this being said I wouldn’t take too much time from the management of your company to try to teach them M&A when they should be focused on growing the business. Have them think about and forming investor case for each opportunity looking at things like synergy opportunities, and growth drivers. These are more important things for them to consider than the minutiae of M&A deal processes. I would recommend hiring a buy-side adviser to help on corporate development. Also, possibly hiring a former banker to run your corporate development in-house may be most beneficial, especially if you plan on doing a couple of acquisitions in a short to medium term. A good buy-side adviser can really help you avoid the common pitfalls of M&A and lend an independent voice to a deal (i.e. like when to back out of a deal).

P.S. If you’re looking for independent board members I would be happy to join. Haha.