Financing a 4x deal in today's market

June 11, 2023

by a searcher in New York, NY, USA

5 million in ebitda, 20 million purchase price. How are deals like this being financed in today's rate environment? Rates are 11% for conventional debt.

Going to be my second acquisition and have blown through my SBA dollars.

Can put 10% down. Don't want to raise equity.

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Reply by a searcher
from University of Kentucky in Chicago, IL, USA

A non-sponsor deal with $5Mm in EBITDA can be financed via a SBIC fund or a conventional bank. SBIC likely to give more leverage than a bank, but will charge a higher interest rate. Many SBIC funds will offer a unitranche that gets you a blended interest rate that should resemble a weighted average of senior and mezzanine debt. Many SBIC funds want warrants in the current lending environment. You will be challenged to find a lender that will give you more than 50% debt to capitalization. That will put you very short if you are only able or willing to put up 10% equity. Some SBIC lenders will co-invest, but they likely won’t fill the 40% gap entirely. Good size and multiple, so if the deal is compelling you should have many financing partner options.

Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA

in today's lending environment, sellers are more and more willing to play banker and finance part of the purchase price. We just did this on a very large architecture firm sell side. If banks want 11%, and the most your money can earn in a savings account or CD is 5%, Offer a seller note at 7-8%, where everyone wins. Be careful thought about not subordinating that seller note.. can be a deal killer. Also, depending on how much leverage it can stand, you can combine an earnout into the note with a positive and negative adjustment ratchet or just a unidirectional one to give the seller even more incentive, or if you are worried about future performance, it can protect you as well.

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