How do you consider debt to equity ratio for a self-funded LOB?
April 18, 2022
by a searcher from Towson University in Portland, OR, USA
If the cashflow/DSCR substantiates a large loan, what are some secondary & tertiary benchmarks to consider when building a cap table and settling on equity amounts, debt-type, etc.
Like, a max-leveraged SBA 7(a) deal would be 95% blended-debt. If the DSCR is still strong for a range of outcomes, what are the next metrics I should test with this kind of leverage? If it underwrites for the bank is that enough to feel safe? How much balance sheet steroids is TOO much balance sheet steroids?
I understand the range of factors specific to the deal & industry is enormous...purchase price, growth rate, asset heavy/light, price elasticity, etc.
I've just been thinking more about variable interest rates and debt load in this rising rate environment. Especially since most companies i've looked at have never had much debt (or any!).
If anyone has some thoughts, essential rules-of-thumb, or material on the topic...I would appreciate it.
from Towson University in Portland, OR, USA
Essentially; pressure test, pressure test, pressure test! Focus on your cash flow model. Testing a rate increase of 2 points over a year is probably acceptable, but test for 3, 5, 6 points and see when it breaks!
Beware of too much Covid tailwinds in LTM earnings. If needed, revisit the deal structure with the owner. Consider bringing more equity or larger seller-note with protective terms.
Great Stuff. THANK YOU!
from California State University, Sacramento in Seattle, WA, USA