Across the industry, office equipment dealer M&A has built a head of steam, with most dealer principals at least moderately interested in taking advantage of an acquisition or sale. But where’s the money coming from? While there are multiple ways to finance a transition, among the more common approaches for dealers is the leveraged buyout.
A Quick Primer
Using leverage (or debt) to buy smaller, privately held businesses is common practice. Whenever a buyer lacks the requisite cash and borrows part of the purchase price against the target company’s assets (receivables, equipment, inventory, real estate) or cash flow (future cash), that’s an LBO.
Asset-based lending is often a component of this financing. For office equipment dealers it can be relatively easy to evaluate the loan to value of a specific asset like real estate, fleet, receivables, or inventory. But in this high EBITDA-multiple sale environment, rarely does an asset base alone cover the total amount of the purchase price. Lenders may also consider historical cash flows, but with the average office equipment dealership sale valued under $15,000,000, it’s rare to find a lender that will take a big part of historical cash flows and pull them into the overall leverage package. Any gap in the leverage obtained to complete the purchase must be covered by the cash reserves of the new owners.
Trends in LBO Multiples
Debt to EBITDA is among the most common multiples lenders will evaluate when scaling the amount of their investment. As the M&A environment heats up, the amount of leverage that lenders are willing to accept as part of the transaction increases, along with the amount of money they will advance. According to Pitchbook,
LBO multiples are now 20 times higher than in 2009, and according to Goldman Sachs, they’re in the 99th historical percentile.
Takeaways From Recent LBO Trends
- It’s more of a seller’s market. There are multiple types of buyers seeking the right office equipment investments
- Lenders are in the game. Lenders are taking on more leverage to help facilitate higher purchase prices through an LBO structure
- It is estimated that as many as 70% of all office equipment dealership acquisitions are financed via LBOs
- Now is a good time to educate yourself on the potential implications of acquisition and sale
At LEAF, we help office equipment dealer principals maximize the value of their enterprises with the LEAF CapitalAlliance™.