Has anyone done an LBO or all debt deal with no equity?

searcher profile

April 10, 2020

by a searcher in Florida, USA

In the case of a target with high FCF and high debt service coverage with very attractive EBITDA multiples, an all debt deal seems the way to go, but am having trouble with capital structure. Am seeking Mezz Debt to cover 30% of TEV or some alternative. What would you do?

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commentor profile
Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA
Yes, definitely possible. Depends largely on working with a non-bank lender that is exclusively focused on cash flow and the prospects of the business and management team. Which is to say that the lender’s view of the world is that selling the business as a going concern is the only way to recover some value in the event of default. Most of this type of lending comes out of private debt funds and as such check size typically needs to be higher rather than lower. Basically you need to find a junior capital provider that is willing to do the whole deal. Good luck!!
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Reply by an investor
from Illinois Institute of Technology in Pasadena, CA, USA
My first deal was 0% equity from me as sole, self-funded searcher: financing from:

(1) AB loan since the target was capital equipment heavy plus draw down on A/R line,
(2) seller notes next tranche, followed by
(3) above-market comp for one of three retained owners who stayed on as president
(4) consulting contracts for other 2 exiting owners, and finally
(5) covenant not to compete for all three selling shareholders.

There were obvious, ordinary income tax costs to the sellers, but they accepted the deal.
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