Hi guys:
What would you consider to be reasonable entry multiple for a potential buyout target please? Trying to do some mock practices but want to find something sensible. Would you consider 10x EV/NTM EBITDA to be good please? (roughly 19x P/E in this case) Or would this be too high?
Thanks!
It depends on the industry that the target is in, which also influences how much lenders would be willing to lever the business. The more leverage you can get, the more you can pay with less incremental equity contribution. Also I don't think I've ever seen anyone credibly ask to lever or pay off of NTM EBITDA. It's usually LTM EBITDA with QoE-vetted pro forma adjustments which are agreed upon across all parties (sellers / buyers / lenders).
With regard to leverage, 50% LTV is a decent rule of thumb, although also highly dependent on the risk profile of the business. If it's riskier then the lender would want to see more equity contribution and a lower LTV at close (e.g., 30% LTV). If it's a pretty sleep at night company then lenders would be more willing to have a higher LTV at close (maybe maxing out at 65% - 70% at the highest end?)
Thank you so much unfuckthis !
How would you think about it if a business already has 4-5x leverage, in a defensive industry? I guess being already 4-5x levered reduces its ability to take on more debt/reduces IRR potential, is that the right way to think about it? I'm looking at something in the packaged food industry as a practice...would love to hear your view on how to analyze it! Thank you!
Well if it already has debt then that gives you a good idea as to what the realm of possibility is with regard to leverage. Obviously if it is levered 4.0x - 5.0x already, that indicates that some lender out there was comfortable lending up through that leverage point.
Most transactions are structured as cash-free / debt-free transactions. So the purchase price (inclusive of new debt and new equity) has to be high enough to take out both the existing debt and the existing equity of the business. In this scenario, you'd just re-lever the business probably in the 4.0x - 5.0x range again and plug the rest of the purchase multiple with new equity.
Something to consider is making sure that the Company's FCF can support the debt load and cover the interest payments / amort / capex costs (i.e., making sure the FCCR remains above 1.0x).
very helpful unfuckthis ! thanks!
Another quick question please, unfuckthis ,if you don't mind (and thank you for all the insights!) - assuming 4-5x debt, how much would be revolver vs first lien? how do you usually decide that? thank you!
The revolver is unfunded at close, so when you're quoting 4 - 5x leverage, that's all term loan. w/r/t to revolver size, you'd just size it appropriately to cover any working capital swings, seasonality, etc. in the business. So maybe 0.25x - 0.50x EBITDA would be reasonable. That said, no one ever really runs a projection model expecting to draw on the revolver.
For OP's purposes, correct, you usually don't model revolver draw on close, but for certain asset-heavy companies you can absolutely do a drawn ABL at close in lieu of a 1st lien depending on what the borrowing base looks like. Just did that for an LBO that I worked on.
The other big factor that hasn't been discussed much = multiple expansion as EBITDA grows.
A co with $1M EBITDA will generally sell for a much much lower multiple than a co with $20M in EBITDA.
Industry is big too, like the others said, stuff like SaaS is red hot right now and can go at insane multiples. Lenders have a hard on for SaaS too right now which will bite them in the ass sooner than later :)
Model FCCR at 1.25x to be safe.
Is this mezz or senior or a blend?
What are year 2 and year 3 projected leverage, aka any am or EBITDA growth (also, how realistic is growth)?
Following on from above, would breaking down the total leverage slapped onto the TargetCo as 2/3 senior debt & 1/3 sub debt be a reasonable way to do so?
(e.g. for 6x leverage, 4x from term loans & 2x from HY bonds)
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