Playbook: The minimum amount of capital it takes to acquire two businesses with £2m in combined EBITDA and £8m in combined revenue

Clients embarking on the first acquisitions of their buy-and-build strategy often ask us the same question: what is the minimum amount of capital they need to secure institutional debt funding?

As a primer, we recommend reading our article on the essentials for launching a buy-and-build strategy: https://www.langdoncap.com/post/buy-at-4x-sell-at-10x-what-you-need-to-fund-your-first-buy-and-build-acquisition

A real life example:

The proposed deal:

• Equity alignment: Founders inject £200k of cash equity on day-one.

• Minimum EBITDA: Founders acquire two businesses with £2m of combined LTM EBITDA on day-one. This unlocks the lenders with the highest risk appetite and the most flexible debt structures. Don't know where to find potential acquisiton targets? One of our buy-and-build clients sends 7,000 physical letters to small-business owners ahead of each acquisition round. Typically this generates around 20 meaningful conversations, and two to four signed Heads of Terms. Another of our buy-and-build clients runs mass email campaigns, sending around 10,000 emails to business owners each month to unearth deals. Don't know how to do this yourself? Outsource it to an email marketing company for roughly £300 to £1,500 per month.

• Quality of earnings: High. The target companies are in a B2B sector with regulatory-compliance-driven revenues. Clients are required by regulation to carry out annual inspections of commercial-property health-and-safety hardware. Where inspections reveal that safety standards are not met, clients must buy replacement hardware. Revenue is therefore effectively recurring, underpinned by regulated inspection income and the replacement-hardware sales that follow. Playbook tip: target companies in the right sectors from the outset to make the debt financing process easier.

• Opening leverage. Founders borrow £6m at opening leverage of 3x to cover day-one cash consideration and all transaction fees (your solicitor, lender's solicitor, lender's finanical/tax/legal due diligence fees). Earnings quality for this sector is high, so our non-bank institutional lenders will currently accept opening leverage of 3x, subject to prevailing market conditions. If earnings quality of the targets were low, non-bank institutional lenders would likely cap opening leverage at 2x, and bank lenders at 1-2x.

• Sector experience. The founding team brings relevant sector experience from previous careers. Don't have experience in the sector as an employee or owner? Find a co-founder who does. Network, or post a free advert on any number of job boards, such as LinkedIn.

• Integration experience. The founding team includes a COO with 20+ years' experience of integrating smaller businesses into larger PE backed groups. Don't have a co-founder with integration experience? Hire one. Post a free job advert on LinkedIn and you should receive a healthy list of applicants. Offer your chosen hire a start date that falls on the simultaneous completion date of your debt financing and SPA.

• Seasoned CFO. The founding team includes a strong CFO with experience in debt-covenant reporting, extensive financial modelling and PE-backed businesses. Don't have a co-founder with the right experience? Lenders will require this, so hire one using the same approach as for the COO hire above.

• Business continuity. Sellers are staying in their seats for at least 1 year, incentivised through consultancy agreements, rollover equity and performance-related earnouts.

Indicative financing terms

Our investor - a USD 20 billion AUM fund, with the highest risk appetite in the market to our knowledge - confirmed credit appetite for the deal and proposed the following indicative terms:

• 2% arrangement fee

• 12-14% interest margin - half as "cash interest" payable monthly and half as "Payment-In-Kind (PIK) interest" that is accumulated and paid only upon full redemption of the loan

• exit fee (30-50% of peak outstanding debt) or equity warrant (~20%)

Note: Pricing is indicative, correct as of the date of this article and subject to prevailing market conditions

Pricing rationale:

The fund recognises that, while the founders are injecting £200,000 into the acquisitions, which is significant to them personally, the fund would be financing effectively 100% of the founders' first two acquisitions (precisely, 96.66%).

Injecting more than £200k of cash equity would result in improved terms from the investor by way of a lower interest margin and even removal of the exit fee or equity warrant if the founder's equity (cash or implied) was high enough.

Is this a good deal for the founders?

Resoundingly, we think so. The founders don't have £6m in cash, nor do they have a PE sponsor. At this level of opening leverage, with no PE sponsor and such a small amount of eqiuty being injected upon completion, no other lender would fund them. For a £200,000 capital injection - large personally, but immaterial from the deal's perspective - the founders gain a life-changing opportunity to acquire two businesses with combined revenue of c.£8m and group EBITDA of c.£2m. They will receive salaries of between £140k and £190k each, plus car allowance, 20-30% bonuses and pensions, all funded by group EBITDA - and they retain 100% ownership of the group (provided they take the exit-fee route rather than the equity warrant).

All they need to focus on post completion of the financing and SPAs, is to integrate the two businesses, realise synergies, unlock growth, identify future acquisition targets and repeat the acquisition cycle annually. If they do, they will transform their business prospects irrevoably for the better.

Potential outcome

We have seen a client grow from £1m of EBITDA at the time they first took on external debt, to £14m of EBITDA within 4 years, with a sale to PE at 12x at £168m. With outstanding debt at the time of sale at ~£50m, founders walked away with over £100m to share between them.

Enquiries

For further information, please contact info@langdoncap.com 

About the author

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £200 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

Langdon Capital raises debt and equity for businesses with EBITDA between £2 million and £20 million from private credit funds, banks, private equity firms, special situations funds, family offices and venture debt funds. We raise capital to fund acquisitions, organic growth and turnaround situations. We hold direct relationships with key decision makers including CIOs, Heads of Direct Lending, Partners, MDs and Fund Principals at leading multi-billion £/$/€ AUM global institutional investors and provide our clients with swift, direct market access.

contact info@langdoncap.com | visit www.langdoncap.com 

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