How much leverage is typically deployed in search fund transactions?

September 22, 2021

by a searcher from INSEAD in Singapore

Dear all,

Are there any statistics on the use of leverage in search fund transactions?

For example:
* How much of the purchase price is financed via debt?
* What are the typical debt/equity and debt/EBITDA ratios before and after the transaction?
* What are the obstacles to deploy debt in search fund transactions?
* Are there any significant differences between geographies?

Looking forward to the feedback!

Kind regards,
Jens

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

Each situation is unique. If you need $5 million or less in debt and are looking to utilize the SBA 7A loan program, then you can get away with financing as much as 90% of the purchase price via an SBA 7A loan so long as the cash flow is there to support it. However, even though 90% is allowed in general, it might not work for every transaction. Many lenders like to see the seller hold a note back. The amount of that note can vary based on buyer experience and risk seen in the transaction. Some borrowers decide to bring other subordinated debt into the transaction versus raising all equity. And in some rare cases with a seller note on full standby for at least 5% of the purchase price we can get away with as little as 5% down, or if the business acquisition is an addon to an existing business, sometimes we can even finance 100% of that addon. However, in these cases there typically has to be strong experience from the buyer. The differences more have to do with the type of business, management team, experience, and structure of each individual transaction regarding what can get done, and less about geography.

If you are looking to use more conventional financing, or looking at transactions where the debt need is substantially above $5 million, then typically the investment bankers are going to only leverage between 50% and 70% of the transaction via senior debt. The more goodwill there is in the transaction versus hard business asset, the lower the leverage typically goes.

If you would like to discuss some specific options, I would be more than happy to do so at anytime at redacted Good luck on your search.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

Having the right fit with your SBA lender is key. The SBA program is designed to handle higher leverage given the 10 year term###-###-#### % SBA Sr debt is a good benchmark to ensure a well structured deal. Just because the SBA will allow up to 90% financing, doesn’t mean that’s the most prudent structure. Debt service coverage in the 1.25 x range or below as quoted by some lenders might also not be the most prudent of decisions. You want to make sure you can transition your acquisition adequately with room for downside and enough room to grow the company.

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