I am in the process of searching for a small company to acquire, and have been struggling to find a target due to the various targets inability to service debt if business declines somewhat. This has led me to pull out of several discussions and I am starting to wonder about my approach.
I am questioning whether I am being too pessimistic/careful when evaluating investment cases (LBO model). Basically, my downside case is always based on declining revenues and slightly worsening margins, leaving the company 10 times out of 10 seemingly unable to service debt to any meaningful degree.
How do you usually think about debt service/leverage/ability to acquire a company in MM PE with regards to safety in a downside case?
Does the company have to be able to service the debt even when facing headwinds, or is this too much to ask for a target?
The targets I look at usually are just about able to service the debt in the base and upside cases, while the downside cases look completely disastrous, leaving me with the decision whether to risk it or not.