Financing for Services Businesses

November 23, 2023

by an member from Vanderbilt University in New York, NY, USA

Hey guys,

I am thinking doing some thinking on what the capital structure might look like for a business / consumer services company that is doing US$5 mm in EBITDA and has an Enterprise Value of roughly US$15-20 mm.

From a debt perspective, what are people using to get to 50-60% leverage? Are regular bank loans available? I am assuming it is difficult to collateralize given low fixed assets and not sure how receptive banks would be to this. Is SBA financing the only real route?

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Reply by a searcher
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA

If TEV is $15mm, may be workable with SBA (size limits of business could be in play there, whether revenue or employees depending on the industry). $5MM + some conventional to get to ~$8MM of debt used to be a thing. But unless the buyers have direct expertise and a familiarity with the lenders, that could be a tough sale in current environment. I would imagine a debt stack being 40-50% now and equity making up the majority if you were targeting SBA+companion, and even similar in conventional. YMMV if you have a great relationship or a bank that's looking for increasing credit or there's a great investment thesis and expansion plan behind it. Best of luck!

Reply by a searcher
from Northwestern University in Chicago, IL, USA

This is too general of a question. Business services and consumer are very different and quality of revenue can vary widely within that group. A company that has 5 year contracts is different than mostly project based work etc... Better to evaluate when you really choose an industry or better yet have a deal. ~2x leverage is pretty common for cash flow lending to established small businesses as a broad generalization, but will move up or down depending on a lot of factors.

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