Can debt financing be used to acquire a company with minimal EBITDA?
June 29, 2024
by a searcher from The University of Chicago - Booth School of Business in Dallas, TX, USA
I am evaluating a tech-enabled services asset that is unprofitable today, but has a clear and short-term path to profitability, primarily through cost reductions (executive compensation). There will be some one time costs associated with severance and possibly lease terminations/buyout.
The company does ~$50M in revenue and is projected to generate about $500k in EBITDA this year after a loss last year. Asking price is around 0.4x revenue. What are the prospects of being able to raise any debt on this deal?
from Bowling Green State University in Surrey, BC, Canada
I'm curious about this type of situation though - I'm guessing there are lots of tech and tech-enabled that have never really made money, raised some VC money, the VC's are checked out, management wants an out.
Maybe there's a nice little business in there once it's cleaned up a bit. Generally though, there is likely some financing of the transitionary period required - gotta put a bit of gas in the tank. So, the purchase price should reflect that.
All that said, without typical debt financing, it might be tough to get the economics to work for the equity investors since we already kind of know it's likely not high growth.
from University of Notre Dame in Austin, TX, USA