Requesting feedback for financing a deal in Canada
January 01, 2021
by a searcher in Pickering, ON, Canada
Purchase price: 13.5M (including 2.5M in inventory)
Last 3 Years Average EBITDA: 2.2M (Multiple of 6.1)
Seller financing of 3.5M (26% of EV) can be done in 2 ways:
Option 1: As rollover equity (Owner will keep 26% that can be bought out over 5 years)
Option 2: As “collateralized” VTB over 5 years
Questions:
1) How feasible would it be to raise 55-60% of EV###-###-#### 0M) in bank debt without any personal guarantees?
2) Which seller financing option (1 or 2) would be more favorable for raising the required capital?
Deal is in the Pre-LoI negotiation stage. Any relevant notes/experience would be helpful.
from McGill University
For PGs - not required if you’re working with an institutional investor (like Glen at Sage for example). If you have a majority stake and no track record, they may push you for one.
For seller financing, I’m not sure I understand Option 1. If they’re rolling 3.5M and you’re putting up###-###-#### then the ownership would be split accordingly, unless they want some type of pref structure with less equity share. If he puts up 26% of the EV, that doesn’t mean he only gets 26% of the ownership. Focus on % of equity cheque. Nevertheless, I would suggest Option 2. Use the VTB as a source of financing. Offer a 5yr bullet at a low interest rate and negotiate from there. The banks require the VTB to be subordinate and postponed, which is a KEY deal point. They will treat the VTB as equity if this is the case. You can’t offer much collateral though, only a subordinate position to the bank on a GSA / company guarantee. There’s almost no security on a VTB.
Call Mario at Stikeman Elliott - he works with most canadian searchers from the LOI stage forward.
from The University of Chicago in Chicago, IL, USA
On Seller Financing, Option 2 is more likely.
In Option 1, if your equity is, say. 3.5, and if Seller rolls over 3.5, then Seller owns 50% of NewCo, not 26%.
In your example, assume bank is willing to give you 9. In that case your equity needs to be 1 (1+9+3.5=###-###-#### In this situation, under Option 1, total equity will be 1=3.5 = 4.5. Seller would own 77.7% of the company (3.5/4.5=77.7%)
Does the business have any A/R? If you are not getting A/R, then your multiple is more than 6.1.