What interest rate should I expect from PE?

June 05, 2020

by a searcher from University of South Alabama in Mobile, AL, USA

I am getting closer to a potential acquisition but am considering securing PE funds for equity injection. I realize there are many variables when determining interest rate but this is a manufacturing company founded 35 years ago with margins just over 40%. Around $1M in annual revenue. Any additional info you all would need to give me a better idea of rate I could expect from PE firm?

Additionally, is it typical (or accepted) by lenders to have a debt structure with a Sellers Note, PE funds, and the bank's funds? I realize bank will be paid first.

Thanks in advance,

Wilson

Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

PE firms don't lend money, they invest. Also they don't typically invest in businesses with under $1mm in EBITDA, let alone sales. You best bet is to get a SBA 7a loan, where you can finance 90%, might also want to get a small seller note from the seller, which will be subordinate to the banks. With $1mm in Revenue, 40% margins, that is only $400K in GM, less operating expenses, it doesn't leave much for your pay and any debt service,

Reply by a searcher
from University of Texas at Austin in Sioux Falls, SD, USA

Q1: If your are looking for equity, see Hiram's comment above. 40 years and only $1MM in Revenues? I would think very few PE funds would be able to participate in this size transaction. If you are looking for debt, the rate will depend a lot on collateral and how the business is doing. Rates can vary from low mid teens to mid twenties. Q2: Yes, sellers note is usually subordiante to everybody else.

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