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Hi,I'm trying to value a public tech firm for a potential LBO but they have negative EBITDA, net Income and FCF. Does anyone know how to go about this? I could obviously manually change the margins such that they become less negative over time and eventually positive, but it's just a shot in the dark at this point.Thanks and I appreciate any help.
Sounds like a company that makes 0 sense to LBO
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Sounds like a bad LBO candidate.
I don't know about PubCos, but I have sold private companies with negative FCF, to PE that used substantial leverage in acquisition.
There are two ways this makes sense economically:
1) Keep burning cash but you have a pathway to sell to a strategic with several add-ons and a severely higher multiple - Strategic tech M&A commands sometimes multiples of 12-15x ARR while a PE LBO can take place at 8x ARR. The debt service and financing the negative FCF pale in comparison, especially if you complete this in 12 months or less.
2) negative or break-even FCF is paired with a 50-100% YoY rev growth, where the managerial gross profit is over 80%. The negative FCF doesn't matter as the company is basically ploughing cash into growth of sales or product, working to scale up against a tier-1 software player utilizing the latter's sluggishness.
In both cases, the lenders (a combo of a BB and a HYD MF usually) underwrite the PEGs deep pockets and ability to flip the Company into positive FCF paired with softer growth trajectory / strategic m&a / public markets. In both cases, ROIC gets the same healthy leverage bump.
NatRes is right. Even without the possibility of a quick flip, if lenders agree to PIK interest until you pull back S&M and FCF flips positive then a deal like this could pencil out. Might have to come up with something creative to give equity upside to underwriters for them to agree.
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