Ideal levels of leverage?

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October 22, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Los Angeles, CA, USA

On companies with healthy EBITDA margins (20%+) and solid and consistent YoY revenue growth (10%+). What would be the ideal amount of total debt (senior + seller financing). The bank is willing to consider a total debt (SF+Sr Debt) of 75% of enterprise value. However, I am wondering if that is too much? Some feedback I have received has suggested a good rule is 2.5X to 3X EBITDA for total debt, which would roughly translate to 50% LTV in this case. Given the healthy margins, there is ample FCFs to support leverage of up to 75%.

Please assume the plug would be outside/investor equity and also assume the sr. debt is seven years (non-SBA, no PG), and the amortization on the SF is short 2-3 yrs.

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Reply by a searcher
from Babson College in Raleigh, NC, USA
Ideal for whom? Too much-- from whose perspective? It all depends on what you're trying to optimize for, and the various parties would have differing answers. What's good for you as the searcher may not be ideal for the bank, and vice versa. Investors can have a different view, and what's good for the business may also differ. Rules of thumb are also general guidelines, but don't apply 100% of the time. What is your objective in asking the question? That might be helpful in getting more focused feedback.
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