A Rule of Thumb about Leverage

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August 26, 2020

by a searcher from Morehouse College in New York, NY, USA

In my experience, regardless of the business's ability to repay the loan expect lenders to offer 2x-3x on the trailing EBITDA for your acquisition. So if you have a business that generated $1M in EBITDA - you might get as much as $2.75M in leverage. But not much more.

I learned this the hard way.

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Reply by a searcher
from London Business School in London, UK
Thank you for sharing, Bakari. A few questions: does this apply to the U.S. only? Is your experience recent (during the current ultra-low interest rate levels)? What are your thoughts on leverage not for acquisition, but for funding growth?
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Reply by an investor
from York University in Toronto, ON, Canada
It also depends on the industry, EV multiple and cash flows as well. You can use mezzanine debt to add additional leverage, but you'll have to find specialty lenders that do this.
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