Question for lenders

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by a searcher from Murdoch University
in Chicago, IL, USA

1yr ago

Question for lenders

I'd like to understand how lenders look at the equity contribution when evaluating lending opportunities. Do they base it on equity vs cash at close, or equity vs EV? Here's an example: EBITDA: $2.5MM EV: $10MM Cash at Close: $8MM Seller note: $2MM (on full standby for 5 years) Buyer Equity: $2.5MM Based on these numbers, would lenders say that there is 31.25% equity going into the deal? ($8MM x 31.25% = $2.5MM). Or would they calculate they equity contribution based on the EV of $10MM, which would reduce the equity to 25%? Thank you

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reply by a lender 1yr ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

The equity going into the transaction is always based on the actual acquisition price / enterprise value. The only exception is with buyer roll-over transactions. In that case you are only purchasing a portion of the business. So in your example if the enterprise value for all of the stock is $10 million but you are only buying $8 million, your required equity would be based on the $8 million portion you are acquiring. So in that case the $2.5 million would be 31.25% of the purchase price. If you have any additional questions along this line or with financing, please do not hesitate to reach out to me at any time here or at redacted