Hello community - I've got a question regarding deal/debt assumptions that I'd love to get perspective on.
I'm looking at a business that does about $2.5 million in EBITDA on roughly $10M in revenue. We've had loose valuation discussions and are in agreement around the $10M - $12M range. The company has funded their growth using a revolver that is maxed out at $5M. My question is, what typically happens to that revolver as a part of the transaction? Specifically, who is responsible for paying it down? My assumption is that since the revolver has been the tool to spur growth (which is the only reason the company is valued at $10 - $12M) it should be the responsibility of the seller to pay down the revolver using the proceeds. With interest rates where they are, the deal doesn't make any sense if I'd have to continue to pay the interest on the revolver AND the payments on my debt to fund the deal.
As I see it, the options for moving forward include:
a) I pay the seller full value ($10M - $12M) and inherit the outstanding revolver (not viable for me)
b) I pay the seller full value ($10M - $12M) and they use the proceeds to pay down the revolver thereby marking the true value down to $5M - $7M
c) Some compromise where the value of the business is marked down in proportion to the amount of the revolver that is paid down and a buyer-friendly deal structure is implemented to "compensate" me for taking over a portion of the unpaid revolver
Perhaps an elementary question, but I'd love to get perspective before I continue conversations with the seller. Thank you in advance for any experience you're willing to share!
Question on debt post-close
by a searcher from The University of Texas at Austin - Red McCombs School of Business
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I am assuming that the revolver is not secured by assets outside the business or is backed by seller's high net worth. (I am not referring to seller's PG)
DFCF is an over simplified concept. There are times when seller does not keep all cash as part of price.
If a business growth can be financed through revolver and the business requires no, or little, CapX, then its multiple is going to be higher. Such businesses are financed with LOC and no term debt (i.e. no SBA).
Happy to elaborate. DM.