Businesses are frustrated with their organic growth and have decided to expand their companies in other ways. Enterprises looking for faster growth are increasingly acquiring another companies. These are often friendly deals where they already know the other company. They can also be new deals where the acquiring company is entering a new region or a new market. With acquisitions comes the need for capital to fund the deals. This M&A boom has sparked an increase in demand for leveraged loans. These are loans provided by a bank, finance company, mezzanine lender or other lender used to finance an acquisition. Leveraged loans are based on the future cash generation of the acquired business. Before receiving a leveraged loan, a company needs to be aware of a few key factors. It needs to ensure it has adequate capital post-closing to operate and grow the new business. It needs to ensure that the purchase price and loan requirement is within accepted leverage ranges for the leveraged loan market.
If the purchaser is established and has strong cash flows, then the lender can cover as much as the full amount of the acquisition. For middle market companies, loan amounts are often based on the company’s historical EBITDA, earnings before interest, taxes, depreciation, and amortization. It is calculated as a multiple of EBITDA, usually around 3.5 times it. Many companies underestimate two important variables when acquiring another business. It usually takes more money to successfully integrate and grow an acquired business. It usually takes more time to get the business to the desired level.
Finally, the business must have a well-informed and knowledgeable management team in place to handle obstacles that may occur throughout the process. The management team must have the experiences and understanding of the business to perform the required goals to meet the loan repayment and still gain a profit.
A leverage buyout is not something every business can perform. It is advantageous for your business to find a proficient financial advisor with the familiarity and practice to unite you with the accurate funding routes.
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