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2,149 Views | 18 Replies | Last: 7 yr ago by The Wonderer
BBDP
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AG
For those of you who run a "small" business.... are there any rule of thumbs on dept?

EX.
Consulting company does $10mm in fees, has hard assets of 1mm, how much debt is reasonable?
Company is less than 100 people. What kind of dept is typical? Terms?

I know its open but I am curious what you have seen in successful (long term) companies.

Thanks!

BBDP
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AG
Do you use a line of credit for cash flow issues?.. payroll? If so; how much?

Say payroll is $500,000 per month....(missed a zero)

Borrow for finish out on a lease?
Company vehicles?
Finance software?
Finance hardware?
What term is reasonable for the above? 5 year for a car?

What are the advantages to financing these things?
Stive
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AG
Is dept kind of like debt?

Asking for a friend.
Duncan Idaho
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Your numbers don't make sense.

$10mm is revenue agaist 100 employees is only $100m in billing per employee.

And $50m a month in salary is enough for about 4-6 people.
CivilAg10
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AG
In all fairness, he just said less than 100 folks. But you're correct, those numbers align more towards a 30-40 person outfit (based on my experience in Engineering/Consulting)
BBDP
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AG
Sorry for the mistake in the title... and yes, its $500,000 payroll.
The firm would be closer to 100 people than 50.


Stive
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AG
The title happens. It was the repeat of it in the body of your OP (combined with the title) that I was having fun with.
BBDP
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AG
I have dyslexia.
p = b = d and so much more.
The Wonderer
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AG
BBDP said:

I have dyslexia.
p = b = d and so much more.

and a handle of "BBDP"
LostInLA07
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AG
What's wrong with a handle that's one letter repeated 4 times?
ChoppinDs40
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AG
Our firm has a line of credit based on "eligible" AR. Eligible AR can change based on lenders and underwriters but for simplicity, it's something like any AR aged under 90 days. Once a customer goes over 90 days, that amount and all other amounts from that customer go bad and can no longer be used in your borrowing base calculation.

Need to show history of collections and stable if not growing revenue streams. Having unencumbered assets to collaterlize also helps.

Senior or growth debt for a services firm are hard to come by as cash flow lending can be hard to substantiate or be expensive. However, as O&G fallout has left a void in capital markets, a lot of senior lenders, Mezz lenders, and PE firms as a whole are having to funnel resources elsewhere, especially here in Texas.
Bonfire1996
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AG
Healthy ratios show debt levels that do not exceed 3x EBITDA. Earnings before Interest, Taxes, Depreciation & Amortization.
So, for example, if you have $400,000 in net profits with the following:
$15,000 in interest expense
$100,000 in taxes
$30,000 in depreciation and amortization.
You have $545,000 in EBITDA. A Healthy business would have less than $1.6 Million in debt.
ChoppinDs40
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AG
very general but for the less sophisticated business owner, EBITDA should be thought of as "Cash left to service debt holders or investor/owners".

EBITDA is typically the metric for this; however, companies with large CapEx requirements are underwritten using a more "Fixed Charge Coverage" formula. Million different ways to look at it, but yeah. Anything GREATER than 3x EBITDA (i.e., Total Debt / EBITDA >=3) can be a stretch.
Bonfire1996
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AG
That's right. Companies that have heavy equipment needs, depreciation is very much an actual expense as it matches (somewhat) principal payments on debt which are typically balance sheet transactions.
ChoppinDs40
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AG
except when equipment is financed with balloon notes and sold with salvage value.

Sorry, I digress. I worked on a large refrigerated trucking company's debt recap earlier this year and it still gives me nightmares trying to convince Mezz and Junior lenders that EBITDA doesn't mean jack here if you're trying to underwrite cash flow.
BBDP
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AG
Thanks Bonfire and AggieFanatic09.

That's what I was looking for.
ChoppinDs40
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AG
no problemo - I work full time in M&A with a focus on transaction and capital advisory.

This area of discussion is what I do on a daily basis.
BBDP
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AG
How much would healthy ratio's vary per industry?
Say oil and gas with lots of volatility compared to manufacturing (low volatility).
Is oil and gas at 3:1 just like manufacturing?

ChoppinDs40
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AG
I would say that's pretty standard. However, risks with industries and specific companies can lead people to completely pull out or back off those leverage amounts.

For example, I haven't worked on an Oil & Gas related deal in nearly 2 years. Up until October 2014, Oil Field Services, E&P and oil field related manufacturing were a good bit of what we worked on. That doesn't mean there aren't profitable companies out there; many lenders had to reallocate their portfolios and basically have a "no-go" on any O&G deal, regardless of how good it looks.

The risk there is that a company was underwritten and levered at 3x on $10M EBITDA, which is fine... until EBITDA drops and all of a sudden that 3x on $10M turns into 6x on $5M. This is part of the risk and why business diligence, along with legal, financial, insurance, etc. diligence are all performed before a sophisticated lender will provide anything.

Then you have people that personally guarantee company debt and subsequently think that amount of leverage is easy to get. SMH.
The Wonderer
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AG
AggieFanatic09 said:

I would say that's pretty standard. However, risks with industries and specific companies can lead people to completely pull out or back off those leverage amounts.

For example, I haven't worked on an Oil & Gas related deal in nearly 2 years. Up until October 2014, Oil Field Services, E&P and oil field related manufacturing were a good bit of what we worked on. That doesn't mean there aren't profitable companies out there; many lenders had to reallocate their portfolios and basically have a "no-go" on any O&G deal, regardless of how good it looks.

The risk there is that a company was underwritten and levered at 3x on $10M EBITDA, which is fine... until EBITDA drops and all of a sudden that 3x on $10M turns into 6x on $5M. This is part of the risk and why business diligence, along with legal, financial, insurance, etc. diligence are all performed before a sophisticated lender will provide anything.

Then you have people that personally guarantee company debt and subsequently think that amount of leverage is easy to get. SMH.


This is a killer when those people leave and EBITDA tanks and the banks come calling.

Smh
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