Past Financials Don't Always Support Debt Service

December 12, 2023

by a searcher from Iowa State University of Science and Technology in Leesburg, IN 46538, USA

I'm curious how others view companies who's past financials only support the debt service post close for the past couple years. For instance I'm looking at a well water services company that has ~$800k EBITDA in 2022 & 2023, ~$500k in 2021, ~$190k in 2020, ~122k in 2019 and ~280k in###-###-#### Debt service would run around $370k at the asking price. That works for their current performance but going back a few years it doesn't.

Normally this would be a no go for me as I prefer a business that's been steady and ready for me to improve it, but the business is the leader in their area as a complete stop for well water services, excluding interior plumbing, which would be something I'd look to add. If I move forward the key is to figure out what is different and has caused them to jump so much in a short time and if it's sustainable, but I'm just curious if others just pass over them, as I normally would, looking for a "safer" company or if they take the time to dig in.

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

I agree with everything stated above. It also sounds like you are closer to having stabilized cash flow for more like three years if the debt service is $370,000 and the adjusted EBITDA in 2021 was $500,000. That would be a 1.35x DSCR based on my calculations in###-###-#### From a lending perspective, we are consistently getting deals done where the cash flow works in 2022, interim 2023 and TTM###-###-#### So long as there is a good reason for the growth and you believe it is sustainable, then the deal should be financeable as well.

One thing to keep in mind, if the company had sustained cash flow at a higher level, you probably would not be getting it at the same price you are today. That is one of the issues in buying a growing company. You can sometimes get it at a bit of a discounted price based on historical cash flow. Again, there is risk to this if cash flow were to revert back to previous levels. You would just need to do your due diligence and be confident the growth achieved is permanent. If you need any help assessing the opportunity we do free financial assessments from a lending perspective. You can reach me here or directly at redacted Good luck with your decision on this one.

Reply by a searcher
from Columbia Southern University in Idaho, USA

It definitely sounds like an interesting opportunity. It's important to look at the company's operations and performance in detail to make a data-driven decision on whether or not it's worth pursuing. Perhaps the recent surge in EBITDA could be due to strategic changes made by the current owners, or maybe there are other factors at play. Bottom line, it would be worthwhile to do your due diligence and get a better understanding of what is causing the positive trends before making any commitments. Good luck!

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