DSCR on $5-$10M deals and implications on growth rates

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by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Boston Metropolitan Area, USA

1yr ago

DSCR on $5-$10M deals and implications on growth rates

Just read a great post from ^redacted‌ on financing deals in the $5-$10M ent value range.

I've been looking at deals in this range, and am surprised that banks are willing to go to a 1.25 DSCR. From my perspective, this much leverage removes any margin of safety. While I intend to grow the business I acquire, I am aware of the risks that revenue can drop in short term if key employee of customer leaves.

I feel more comfortable withredactedDSCR. Or course once multiples get above 4.5X (with my equity plus sellers note getting into the 20-25% range with 70-75% bank financing at 10.5% - 11.0%) my cash flow model gets very tight, in theredactedDSCR range

Are there any self funded searchers who think I am missing something? Or is the bottom line any deals above 4x adj EBIDTA simply require Year 1 growth?

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Reply by a searcher 1yr ago
from Loyola Marymount University in Miami, FL, USA

I have been thinking about this a lot as well and have come to the conclusion that I would prefer to raise additional equity to make sure the investment is as stable as possible. Even if that means giving up a substantial amount of equity. Organic growth initiatives often take more time and capital than most people think (I have bootstrapped my last 2 companies, so I have experienced this first hand). If the majority of your cash flow is going to servicing the debt, it is going to be very hard to grow without putting the entire business at risk. I would also probably prefer to buy a much more solid business at a slightly higher multiple (even if I only end up owning 55% of the business).

Reply by an investor 1yr ago
from Duke University in Texas, USA

Agree! I have invested in a couple deals like this where the searcher decided to have a lot more equity upfront, and that has allowed the business a lot of flexibility to invest in the growth.

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