Acquisition Entrepreneurship: Debt and Investing (With Basic Modeling Tool)

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by a searcher from Washington University in St. Louis - Olin Business School
in St. Louis, MO, USA

6yrs ago

Acquisition Entrepreneurship: Debt and Investing (With Basic Modeling Tool)

I just wanted to share a couple articles I've published this month in hopes it may help.

1. Inc: What's the Right Amount of Leverage for a Deal?
redacted

A brief overview of the biggest criticism I get for writing Buy Then Build and what the empirical evidence suggests the "right" answer is--as well as how to justify different, subjective answers (complete with basic modeling tool)

2. On SCORE: Is Acquisition Entrepreneurship Right for You?
redacted

A little more 101 here but emphasizes the intersection of hustle and caution that we all try to balance and having to think like a CEO during the search process.

Enjoy! Please share feedback from your own experience!

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reply by a searcher 6yrs ago
from United States Military Academy in Houston, TX, USA

Thanks for sharing and that's very kind of you to allow others to access your spreadsheet. I have no doubt that you're already aware of this, but I would caution others to not ignore the ITDA part of EBITDA by assuming that EBITDA is a good estimate for cash available. Those are real costs (Depreciation being a good estimation for CAPEX) that will affect your ability to pay your loan payment. Thanks again!

reply by a searcher 6yrs ago
from Washington University in St. Louis in St. Louis, MO, USA

Hi Eric, First, let me say that the editor actually got it wrong. This spreadsheet was actually produced by one of my readers who shared it with me--so I ned to give credit where credit is due!

What I saw that was so interesting was simply the point of diminishing returns. It's not exactly where they intersect, but that by looking at whatever unit of measure you like, they hit a point of diminishing returns.

To me this meant that you could completely eliminate all risk by paying 100%, but you were sacrificing your ROIC. On the flip side you could leverage 90% and maximize your ROIC, but you'd be exposed to being over-levered.

That 40-60% equity infusion seemed to balance it just right. So if you were a believer in portfolio theory, like PE firms are, then having that amount of leverage makes a lot of sense.

If you believe the risk is in the company, then your debt should be smaller. If you believe the risk is in the entrepreneur, then you'll naturally be more comfortable with more leverage--as long as the entrepreneur is you!