What to know when acquiring.
Looking at an acquisition? Here are some financing considerations when contemplating a transaction.
For discussion purposes, acquisition or change of ownership financing may be broken down into three primary categories.
1. Internal Transactions - Management Buyouts or Partner Buyout
2. Consolidation - Company acquiring target (vertical or horizontal)
3. New Business Ownership - Individual purchasing a company
Depending on the three programs, terms & conditions as well as diligence requirements will vary. As a starting point, we will outline very general parameters to dip our toes into the world of financing an acquisition with senior debt (for other structures of debt click here). Here is a snapshot from a bird's eye-view:
1. Leverage - The amount of financing you can obtain is primarily driven by cashflow and capped by the leverage covenant, as well as equity requirements. In general, companies can safely apply 2.5 to 3.5X EBITDA on the target balance sheet depending on the deal structure, ie. VTB terms, Earnouts, cash injection and debt terms. The variability in financing amount is high and nuanced.
2. Pricing - For cashflow loans (not secured by fixed assets), the interest rate premium is typically 100-200 bps above secured lending - depending on the structure of the loan. Risk vs Return.
3. Security - Standard security will include a GSA of the operating business and if applicable, corporate and limited PGs of major shareholders, depending on the corporate covenant strength.
4. Amortization - Will land between 5-10 years for cashflow lending. Longer amortizations may come with some structure, such as a cash flow sweep to reduce the debt exposure over time.
5. Financial Covenants - Typical covenants include DSC at 1.20, leverage covenants up to 3-4x on EBITDA and a liquidity test via a working capital calculation, typically between 1 to 1.50x.
All terms and conditions are negotiable with lenders and depends on how well the opportunity is presented, as well as the competition at the table. There is considerable nuance when it comes to financing a change of ownership event. The Crete Capital team looks forward to leveraging our years of direct experience in this space to discuss the various different scenarios to bring forth valuable insights on your next transaction.
"Crete Capital was a great resource for my acquisition. They were in my corner from start to finish, helping me structure and negotiate the best terms for my financing. It was an invaluable exercise to walk through the various options offered by the market and ultimately land on a deal."
-Enrico Guld, CEO
3CO Holdings Ltd.