What makes an attractive LBO candidate?
- August 11, 2021
- Posted by: Marek Niedzwiedz, Your CFO
- Category: eCommerce Business Acquisition
Companies, including eCommerce businesses, with stable and predictable cash flow and substantial assets, generally represent attractive LBO targets due to their capacity to support larger volumes of debt. Free cash flow is needed to service cyclic interest payments and reduce the principal amount of debt over the life of the investment. In addition, a sizeable tangible asset base increases the amount of secured debt available to the borrower (the least expensive source of debt financing) by providing greater comfort to lenders regarding the likelihood of principal recovery in the event of a failure.
When credit markets are robust, debt investors are increasingly willing to focus more on cash flow generation and less on the size of the target’s asset base.
As I mentioned, lenders generally expect cash flow to be allocated towards interest payments and capital repayments. At the same time, the sponsor (read what is a sponsor here) aims to improve the target’s financial performance or/and bring more “bolt-on” acquisitions. My expertise and practical experience are around that space. Both debt repayment and cash flow growth serve to increase equity value and improve potential returns.