6d • General discussion
When The Capital Stack Says No
There’s a financing question in the latest G1C Group Acquisition Brief that I think is worth discussing inside AON.
Suppose you’re buying an equipment-heavy business for $1.5 million that produces $300,000 of normalized annual cash flow.
You could finance the transaction primarily with a conventional acquisition loan. Or you could separate the equipment, use asset-based financing for that portion, add a seller note, and reduce the amount required from the senior acquisition lender.
The second structure sounds more sophisticated.
But when we actually run the debt service, it can leave the business with less cash flow after closing because the equipment debt amortizes much faster.
That gets to a larger point.
I don’t think we should be asking only, “How little equity can I put into this acquisition?”
A better question is, “What capital structure gives this business the greatest probability of surviving a bad first year?”
We also dig into another development I think matters for acquisition entrepreneurs: private-equity activity is increasing in the smaller end of the middle market. That doesn’t mean institutional buyers are suddenly coming after $1 million Main Street businesses. But smaller platforms need add-ons, and over time that acquisition activity can work its way further downmarket.
For those of us thinking about aggregation, that creates an important distinction between owning several businesses and actually building a platform.
I’d be interested in how everyone here thinks about that distinction.
If you acquired five businesses in the same industry, what would need to be true by acquisition number five for you to say you had built a platform rather than simply accumulated a portfolio?
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When The Capital Stack Says No
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