Loan Pricing and Structure Parameters for Your Leveraged Buyout

Posted on: July 26th, 2022

leveraged-buyout

When approaching a lender for a leveraged buyout, there are unwritten terms or parameters that each party should abide by in order to have the most optimal partnership. The amount of the loan, equity invested, seller note structuring and many more factors contribute to a successful loan deal, partnership, and future growth. The more these parameters are reflected upfront in your leveraged buyout loan origination process, the stronger the reception from the lender.

Understanding the combined size of your company and the acquisition will give you a place to start when determining the multiples or ratios to initially propose. The most important structuring parameter in every leveraged buyout is the EBITDA multiple. Lenders will typically use debt multiples from 2.5 to 4.5x EBITDA increasing with the size of the company and should be all encompassing of different forms of debt. Along with debt multiples, loan to value ratios is used with private equity backed buyouts. Larger deals can have a 55-60% ratio where smaller deals can increase to as high as 70%.

On the covenant side, you have debt service coverage which lenders will require a range from 1.10 to 1.35. There is also the structure of the seller note in relation to the amount of equity put into the deal. The note must be structured properly for the leveraged buyout lender to treat it as equity. A back ended maturity principal in combination with a subordination to the lender is required for a successful deal. Most middle market leveraged buyout loans are priced at 5.0% to 7% for senior debt and 9% to 12% for junior debt.

After 30 years working in the leverage buyout industry, we know how to evaluate the seriousness of equity sponsors and advise our clients on the attainability of a given loan structure to source a loan that will work for you. With many different moving parts, lenders and sellers need a deal that can benefit all parties. The personal business side and motivations to every leveraged buyout is just as important to the calculations around the pricing parameters. Your company will be forming a partnership that lasts typically from 3-5 years and presenting as a knowledgeable and serious entity can be your company’s downfall or greatest strength. Very few players understand the multi-factor complexity of leveraged buyouts. We bring mastery to this process and help our clients not only determine the loan structure and pricing parameters for their deal but how best to present the data and themselves in the optimal light.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.