How does a debt funded deal work?
For purely demonstration purposes, this is a very simplistic example but it will illustrate the point, as follows:
- Purchase price £1m, based on a 4x multiple of ebitda of £250,000
Structure of the deal:
A completion payment of 60% ie £600,000
The balance of £400,000 deferred* over 4 years in equal instalments
- Costs of the deal** say £120,000
- Funds required to complete the purchase:
Completion payment £600,000 plus costs of the deal equate to a total of £720,000.
Less the capital injected by the buyer £100,000.
Balance = £620,000 required to be found to complete the deal.
- Funding available from a debt lender:
- If the funder applies a 2.5x multiple of ebitda, then funding available = £625,000.
There is enough funding available to cover the £620,000 required at completion.
- If the funder applies a 2x multiple of ebitda, then the funding available = £500,000.
Hence the shortfall in deal financing is £120,000.
The options here would be:
- add more private capital to make up the shortfall of £120,000
- reduce the amount of equity you look to buy, which means the price will reduce but the funder will still apply the same multiples of 2-2.5x ebitda, regardless of the amount of equity purchased
- find a co-buyer to add the missing capital – this could be a fellow management team member or a high net worth investor or friends/family network, etc
- talk to the funder to see if they will negotiate on the multiple they will apply
*/** Deferred payments and Costs of a Deal are dealt with separately under their own sections within the Knowledge Hub area of the Valius platform.
