How leveraged should your first acquisition be?

by a professional from Williams College

8 months ago

For folks who have done acquisition or are going through the process, what are your thoughts on debt financing? I've heard of deals with 10% down payment, is that too little or totally acceptable (given that it's harder to get equity funding in this market)?

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lender from University of Florida

Every deal is different. Speaking from purely the SBA world (think $25MM rev and smaller; $10MM EV and lower), 10% is where we like to start, unless the buyer gets a screaming deal from the Seller. As a general rule of thumb, I tell all my customers to shoot for a minimum of 1.5x DSCR for the last two tax returns when looking at how much leverage their business can reasonably support.

Industry, customer flight risk, number of owners in the company's history, customer concentration, EBITDA multiple, the Borrower's PFS and affiliate business interests, to name just a few, are all taken into account when I determine how much down payment I want from my customer. At the end of the day, cashflow is king in SBA lending, so ensuring a company can support 1.5x - 2.0x DSCR should help you feel more comfortable as a buyer.

To contrast with SBA, I was at an M&A forum last month in DFW where a regional bank's Chief Lending Officer indicated they are requiring###-###-#### % down on each deal with at least 1 Personal Guaranty required as well.

One thing to remember in the SBA world is that if you have a great deal, you should be negotiating with your lender. 80%+ lenders sell their loans, which means they are charging you the highest interest rate they can. The other 10% - 20% of lenders (myself included) portfolio all of our loans, which means we do risk-based pricing. If a customer brings us a good deal, we offer fixed rates, lower floating rates, longer interest-only periods, and additional benefits that "sell shops" do not provide.

7 months ago | like reply | 0 likes

searcher from The University of Michigan - Stephen M. Ross School of Business

It all depends on the multiple, cash flow and DSCR so each deal is different. Personally I think 90% leverage is too high but lots of buyers do it. I had about 70% debt in my deal and that felt right to me. The lower leverage helped get through difficult times.

Also, I would not assume it's difficult to get equity funding right now. If it's a good deal, there are lots of active investors.

8 months ago | like reply | 1 like

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