Asset Heavy Deal - How To Best Structure Financial Aspect

ASSET HEAVY DEAL - HOW TO BEST STRUCTURE FINANCIAL ASPECT

Currently going after an asset-heavy opportunity (~$4M in equipment and $1.5M in Property - both currently debt-free).

I want to structure the deal so that I am able to place leverage on these debt-free assets to the extent that the business's margins can support it and the cash from the financing provide as much of the acquisition price as possible. 

Is this "crazy-thinking"? 

If this is not a horrible idea, what should I be careful of here?

Will I most likely have to "take possession" of these assets at close and then turn around and finance them or is it possible to line up the financing prior to close?

Are there lenders that specialize in asset lending, specifically equipment and property or am I better off going to the local bank that houses the company's accounts? 

I appreciate any and all comments. Happy to take the conversation off-line if needed as well [redacted]

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lender University of Missouri - Columbia - 01/26/2021

Dan, the type of equipment could have a huge impact on what is available. Usually you end up having and issue with amortization as a lot of equipment has a short useful life and pushes a max 5 year amortization. However some types (CNC machines for instance) can push this out and make the cash flow more workable. If you would like to discuss email me at [redacted]

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searcher Indiana University, Bloomington/Indianapolis - Kelley School of Business George Mason University - School of Business - 01/26/2021

Ahh I see. The equipment consists of trucks and pump equipment. The company is a commercial well driller.

searcher INSEAD American University in Bulgaria - 01/26/2021

Check if recurring CAPEX is needed

like reply | 1 like

searcher The University of Michigan - Stephen M. Ross School of Business Miami University of Ohio - 01/26/2021

Hi Dan-

I can't offer financing advice that is particular to your deal, but I can offer you advice from an operator's perspective. I operate a very asset-heavy business and can talk you through some of the DD items that are critical to your success. In our business many new operators underestimate the CAPEX and OPEX requirements to run a fleet. In particular, many small business owners who plan on selling their business use the last year of their ownership to take maintenance shortcuts to reduce GOE and jolt EBITDA. Let me know if you want to chat.

Mike

^[redacted]‌ - this is great. Will be sure to reach out closer to DD. Thank you!

No problem Dan. Another tip is to reach out to your local Rush or Mack dealer service departments to get an idea about how long the fleet should last, maintenance intervals, etc. They will be able to tell you a little bit more about your specific brand of truck

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searcher Brown University - 01/26/2021

Definitely agree w/ Michael - do your DD on age of all equipment that requires CapEx vs useful life; LOTS of $ to be won and lost there and the seller will believe they know more than you.

To your original question: asset-based loans are a much bigger pain than a cash-flow based loan (all the titling involved) and will probably garner a lower $ loan than you imagine. I only saw FLV (forced liquidation value) at my prior job so it's treated as if the lender has to sell everything on a firesale. You'll probably get 50% of 70% of the value new or something way lower than expected.

If you get a cash flow based loan, you may have covenants that include CapEx in your calculations but that provided us a lot more room and larger loan balances than any asset based loans.

(Context: worked at a PE firm that owned 7 transportation companies ranging from $5M EBITDA (and asset light) to $50M EBITDA w/ assets)

searcher Indiana University, Bloomington/Indianapolis - Kelley School of Business George Mason University - School of Business - 01/27/2021

Thank you ^[redacted]‌ - sounds like I need to dig into cash flow based lending a bit more.

intermediary The University of Chicago - Booth School of Business Illinois Institute of Technology Cleveland State University - 01/27/2021

1. leveraging fixed assets is done all the time. The amount of borrowing will depend on the bank and the asset value. You want to make sure that debt can be services after allowance for CapX.
2. You cannot "posses" the assets and then finance. unless you have cash with you to first pay the seller, own the business and then finance.
3. In certain industry CapX manufacturers have a leasing program. I have done few deals where financing from the CapX company was better ($, % and amortization) than the bank.

I did not even consider option #3 leasing program. Thank you ^[redacted]‌ for mentioning.

intermediary Illinois Institute of Technology University of Chicago University of Southern California University of Houston - 01/27/2021

Any implications from local/state regs on clean air restrictions for the trucks. Given their age, will you be required to upgrade/replace the fleet? We ran into this issue in California, for example.

^[redacted]‌ - ouch, good point. I don't think so at the moment but will be sure to confirm as I get deeper into this one.

ASSET HEAVY DEAL - HOW TO BEST STRUCTURE FINANCIAL ASPECT

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