How to Finance A Business Acquisition?

Please note there are various ways to finance a business acquisition. The below case studies and examples may not be applicable in certain circumstances. Nevertheless, these are real business acquisition case studies.

Sample Funder Case Studies

Please take a look at the following case studies:

 
  • Management Buy In

  • £7.5m purchase price

  • £3m term loan A

  • £1.5m term loan B

Commercial Cleaning Co.

  • £1.4m Vendor Loan

  • Opening Leverage 2.35x

  • EBITDA DSC 1.9x

  • CFADS DSC 1.4x

  • PE backed Management Buy Out

  • £4.2m purchase price

  • £1.5 term loan A

  • £1m term loan B

Building Products Supplier

  • £2.5m Equity

  • Opening Leverage 1.8x

  • EBITDA DSC 2.5x

  • CFADS DSC 2.4x

  • £3m Borrowing Base RCF

  • £10m Mezzanine Term Loan

  • Opening leverage 1.4x

International Marketing Agency

  • EBITDA DSC 2x

  • CFADS DSC 1.6x

  • £250k term loan A

  • £250k term loan B

  • £1m term loan C

  • Opening leverage 2x

Restaurant & Bar Chain

  • EBITDA DSC 1.6x

  • CFADS DSC 1.4x

  • Management Buy In

  • £500K Purchase Price

  • £200K via Cash at Bank

  • £50K Buyer's Equity

Exhibition Company

  • £250K via Debtor Book Financing

Key Elements Required By Some Funders

1. Leverage - net debt to EBITDA <2.5x.

2. Debt Service cover - all debt costs to EBITDA > 1.4x.

3. CFADS Debt service cover - all debts costs to CFADS >1.1x.

4. Transactions - Loan Providers loans to account for < 65% of transaction (incl fees).

5. Transactions - > 10% equity contribution from acquirers.

Note: The definitions and explanations of the above acronyms are shown below.

 
Typical Funder Process

Please see as follows diagram showing a typical Funder Process:

 

Enquiry by phone or email

Provide initial view of loan provider lending appetite

Review initial information & obtain Letter of Intent

​Lender Meets with Management Team

Lender needs to receive Financial Forecasts

Lender to complete credit application & gain approval

Lender produces documentation and Funds drawn down

2 - 4 Week Process

Acronyms and Definitions:

EBITDA


EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is a metric used to evaluate a company’s operating performance. It can be seen as a proxy for cash flow from the entire company’s operations.

 

CFADS – Cash Flow Available For Debt Service


CFADS is often preferred over EBITDA in determining gearing and lending capacity because this measure does not take taxes and timing of cash flows into consideration. EBITDA is a common metric in corporate finance but in project finance the focus is on actual cash flow.


A project’s cash flow available for debt service (CFADS) is analysed by project lenders (senior debt banks) to determine debt sizes and repayment criteria. CFADS is an important measure that determines debt repayment calculations and ratios including debt service coverage ratio (DSCR), loan life coverage ratio (LLCR) and project life coverage ratio (PLCR).


CFADS is preferred over EBITDA in determining gearing and lending capacity because this measure does not take taxes and timing of cash flows into consideration. EBITDA is a common metric in corporate finance but in project finance the focus is on actual cash flow.

 

CADS is not separately listed on a company's balance sheet. Instead, CADS, or cash flow available for debt service (CFADS), as a ratio may appear as a covenant in the debt agreement with the lender along with other debt service coverage ratios (DSCR).

CFADS is an important measure that determines debt repayment calculations and ratios including debt service coverage ratio (DSCR), loan life coverage ratio (LLCR) and project life coverage ratio (PLCR)

 

DSCR - Debt service cover ratio


The DSCR uses CFADS in the numerator and debt service (calculated as principal + interest) is in the denominator. A ratio of 1.00x means that the CFADS in a period is equal to the total debt service in that same period. A ratio of greater than 1.00x means that there is sufficient cashflow to meet principal and interest payments.

DSCR = CFADS / scheduled debt service

Scheduled debt service = interests + principal repayment

The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is the ratio of cash available to debt servicing for interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity's (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is also used in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender; it may be a loan condition. Breaching a DSCR covenant can, in some circumstances, be an act of default.

Break-even point

Total overheads divided by GP% for any given period, provides the sales required to recover all costs.
 

 
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