Quick Poll: Leverage

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May 01, 2023

by a searcher from Columbia University in New York, NY, USA

Which would you prefer?
1. Bigger deal with maxed out leverage
2. Smaller deal with more equity, less debt

(I know this will vary widely depending on individual circumstance, deal, risk appetite, etc. I'm just curious to see how other folks are thinking about this in terms of opportunity vs. risk, particularly going into a recession.)

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Reply by a searcher
from Rutgers in New York, NY, USA
considering the next few years, id primarily base the debt / equity mix on:
1.) sensitivity of the business’ cash flows to a recession
2.) how capital intensive the business is

if we’re looking at a business with customers that’ll still spend about the same amount over the next few years (govt, medical, etc), id probably max out leverage

the exception being that if customers take a long time to pay while the business requires a lot of upfront cash to generate revenue (this would be its own liability in a recessionary environment where access to capital is limited)

for everything else, there’s mastercard (joke)
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Reply by a searcher
in Galena, IL 61036, USA
How long is a piece of string? Who holds the notes on the debt? What are the terms on the debt? Right now with rates at stupid o'clock, you'd probably want to reign in your debt slightly as long as it doesn't affect the operations of the business. In a previous life when interest rates were -1%, you might have been happier with higher debt. It really is case by case and takes in a plethora of different factors.
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