Case Study: Import/Wholesale business – Refinance, M&A funding

by | 17 Aug 2021 | Business & Corporate

The owner of an industrial import/wholesale business had two leading priorities, (1) acquire “bolt-on” businesses to grow the size and product offerings of his business and (2) buy a new high-end family home.

The Challenge
The business’s P&I repayments were around $75,000 per month, which caused a serviceability issue based upon how home lenders assess loan repayments.

While the client had a preference to not change banks, the credit appetite of the existing bank was likely to present challenges in efficiently and confidently chasing the M&A strategy – and if they did provide additional funding, the repayments would only make the home lending situation worse.

The Solution
STAC commenced by gaining an in-depth understanding of the business – not only financial analysis but also digging deeper into the qualitative analysis; factors such as industry and competitive forces, management risks, business strategies and value proposition, supply chains and risks, customer segments and concentration, SWOT analysis etc.
Armed with this deeper understanding of the business and its particular strengths, we were able to put together a persuasive deal pitch to tender to the market, to seek out terms that would achieve both of the outcomes the client was seeking.

The result of the process delivered two high-level options:

  1. Major banks were willing to offer terms with attractive interest rates and slightly reduced repayments, however only proposing leverage of 2 to 2.5x EBITDA for future acquisitions – and even then, the approval-risk would still be reasonably high.
  2. A “neo-bank” offered terms with interest rates 1.5 to 2% higher than the majors, but with a far more attractive facilities structure – significantly lower repayments AND providing clear parameters to fund future acquisitions with debt up to 3x EBITDA.

The significantly lower monthly repayment structure was achieved by (1) negotiating an extended repayment term and, (2) splitting the debt into term debt and a Line of Credit, with the latter’s limit being negotiated based upon arguing the metrics and strengths of various balance sheet factors.

The Outcome
Although the neo-bank offer came at a higher interest cost (and at today’s BBSY of about zero, this meant no less than a 50% higher interest cost), the confidence of being able to go to market to negotiate business acquisitions (typically bought at Enterprise Values of 3 to 4x EBITDA) and obtain debt leverage at up to 3x EBITDA, actually equated to some pretty persuasive maths, for example:

Target acquisition with $1M EBITDA
EV of 3.5x = purchase price $3.5M
100% debt funded (leveraging against existing business’s EBITDA) at 4.5% rate = interest cost $157k pa = $843k EBITDA accretion

Alternatively, using a major Bank at 2.5x EBITDA would mean that, at a 100% lend, twice as much of the existing business’s “equity” would be chewed up for this purchase, therefore significantly reducing capacity for further acquisitions.

The benefit for a bank though would be interest cost, at say 2.5% rate = $87k interest = $70k greater EBITDA accretion.

When reviewing an overall cost/benefit analysis, the client decided that the relatively minor impact on EBITDA accretion, versus the ability to acquire more businesses – and therefore achieve an overall greater EBITDA accretion – made very clear logical sense.

Shortly following the refinance, the client secured their first “bolt-on” acquisition, with the bank promptly providing 100% funding as promised.

In regards to the home loan – with the lower repayments in place, we were successful in obtaining formal approval to purchase a high-end home.

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