Lenders who see earn-out/seller financing in lieu of equity injection?

January 07, 2025

by a searcher from Rice University - Jesse H. Jones Graduate School of Business in Houston, TX, USA

Any middle market lenders in the ranges of $40-50M who will see a 5M earn out and 5M seller financing as equity injection? Company doing $50M in revenue, 20% EBITDA margins.

Thank you!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

^redacted‌ Thank you for the tag. When you start looking at transactions in the true middle market lending space, typically you are seeing lenders providing financing at a 50 to 65% LTC and often with the senior debt limited to somewhere between a 2 and 3x multiple of adjusted EBITDA. They do not necessarily require true borrower equity to make up the difference from what they will lend and the purchase price, but what they will accept typically varies from lender to lender. Most lenders will accept borrower / investor equity, seller notes, mezzanine debt (so long as the cash flow still works) and seller roll-over equity. They usually want a minimum of 10% to 25% of fresh borrower equity depending on the lender. Typically earn-outs are not considered equity because there is no guarantee they will ever be paid and they are not part of the direct purchase price. If you are looking at a that large a transaction, you are likely going to be need substantially more equity in your capital stack to meet lender requirements than $5 million, and you cannot rely on the earn-out for part of that equity. I hope this helps. I do not mean to be the bearer of bad news, but I always want to provide accurate guidance.

Reply by a lender
from University of Southern California in Los Angeles, CA, USA

I don’t think lenders lending $50m hang out here. Your best bet would be hiring an investment bank to help with this or reach out to private credit funds.

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