I'm looking to build some general knowledge on financing an acquisition, It would be great to get your thoughts on these questions.
Does anyone have any thoughts or principles they use to determine the best capital structure (Debt / Equity) for a particular business?
Outside of interest rates, what are the key things to consider when evaluating debt financing options and potential lending partners?
Debt Financing Questions
by a searcher from Harvard University - Harvard Business School
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Generally, best practice in acquisition financing would have businesses with large, stable, recurring revenues (in industries that are not cyclical) lever up the most, while those in cyclically-exposed, non-recurring revenue businesses have less. But I also encourage you to think about the timing of cash flows and no just revenue/sales -- just because you made a million dollar sale today doesn't mean you have a million dollars of cash laying around. Your conversion of sales to cash is an important metric to also keep in mind.
Creditors will generally underwrite to a "worst case scenario" and I encourage you to also think about those scenarios as you agree to increase leverage in an acquisition. Each dollar of interest is adding a fixed cost onto your platform, so you need to be fully confident that the platform can pay off that cost and provide you a sufficient return (in terms of excess cash flow) to compensate for the embedded risk of that higher-cost model. The cost of debt will potentially impact your ability to price to peers and the time and effort of servicing your debt may detract from your ability to drive increased sales/profitability as a CEO. These are downsides to debt (beyond just bankruptcy risk) that you should consider when contemplating the downside of a lower equity injection.