In my post from October, I discussed debt coverage ratios and EBITDA multiples. Now let’s talk about projecting cash flow. I’m shocked how many buyers make offers without figuring out what the cash flow will be with financing. I’m not alone either. I’ve spoken with many loan officers that deal with the same issue. This article is long overdue.
Different lenders underwrite acquisition financing a little differently; however, they all typically want to stay under 6 x EBITDA on leverage. The reasoning is fairly simple…cash flow. As we’ll see below, agencies don’t cash flow well when they leverage themselves over about 6 x EBITDA. One of lenders’ key underwriting metrics is something called the debt coverage ratio, which is a measure of the cash flow cushion over debt payments.
Acquisition financing can be difficult to secure, but if the deal, including the person attempting to get financing, cannot get approved legitimately then it’s not meant to be. That is both a truth and a warning. Over the years, and [...]