Tool # 2 - Acquisition Capacity Estimator

How large of a company can you purchase?

Have you ever wondered how much acquisition funding is available for your company? The Acquisition Capacity Tool calculates the total dollar amount of acquisitions you can fund based on four variables:

1) EBITDA: Your business' most recent trailing twelve-month EBITDA

2) Leverage Multiple: The estimated amount of leverage a lender would support for your company. We use 3.0x in our example

3) Acquisition Purchase Multiple: The typical acquisition multiple for your industry. We use 5.0x in our example

4) Existing Debt: Your current outstanding net debt, including lines of credit, mortgages, term loans, and other forms of interest-bearing debt, less cash

Imagine your company generates $6 million in EBITDA per year, the lenders support a 3.0x leverage multiple, and your target acquisition’s multiple is 5.0x. With these assumptions, your maximum debt stands at $18 million ($6 million times 3.0x). If your company already has $2 million in debt, your borrowing capacity on a stand-alone basis becomes $16 million.

The question is: How does one transform $16 million of borrowing capacity into $40 million of acquisition capacity? The answer lies in a simple mathematical formula: dividing the borrowing capacity by the equity consideration ratio. Conceptually, you are borrowing against the EBITDA of the target company, with lenders assessing the combined entity's future ability to service the loan.

Assuming a leverage multiple of 3.0x, you can potentially borrow up to 3.0x the target’s EBITDA, in addition to the $16 million stand-alone borrowing capacity calculated earlier. With a purchase multiple of 5.0x and lenders extending funds at 3.0x the target’s EBITDA, your company could fund 60% of the purchase by the target’s borrowing capacity (3.0x divided by 5.0x). Meanwhile, your own contribution would be only 40% of the purchase amount. As a result, your total Acquisition Capacity in this case is $40 million ($16 million divided by 40%).

The model includes a sensitivity table that demonstrates the impact of the four inputs on the total acquisition capacity. The maximum leverage significantly impacts the acquisition capacity, and Valitas has found that a well-run financing process can often add 0.5x to 1.0x to the available funding, along with improving other lending terms. This drastically increases our clients’ acquisition capacity.

Ready to Explore Your Acquisition Capacity?

Discover the potential your business holds for strategic acquisitions by using the tool below.

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