Leveraged Finance for Entrepreneurs

16-May / Articles / 0 COMMENTS / by cdobbin

Leveraged finance involves funding a company with more debt than would be considered normal for that company or industry. This type of funding is normally done for very specific reasons such as acquisitions, shareholder buyouts, management buy-ins, special dividends, or in private equity sponsored transactions.  As leveraged finance is purpose specific, the higher than normal debt level is shorter term in nature.  The meaning of “higher than normal” varies significantly when dealing in the public vs. private markets.  In the private capital markets, leverage usually does not exceed 4 to 5 times EBITDA (earnings before interest, taxes, depreciation and amortization), with some covenant buffer included in those figures.


The process to arrange leveraged finance is well defined.  Generally speaking, a company would hire an advisor to explore their financing options.  The advisor would present different financing structures to company management depending on the reason for the additional leverage.  The financing alternatives would range from senior secured debt, subordinate financing, mezzanine financing (see my earlier post on mezzanine financing here) and high-yield debt such as junk bonds.  The advisor would review each alternative and illustrate how each option would impact on the company’s capital structure and future cash flows. Once management decides which alternative to pursue, the advisor would prepare a deck/pitchbook for the various lenders, run a process, negotiate terms and finalize the funding.


Many of the financial journals in North America mention large multi-billion dollar deals involving leveraged finance involving publicly traded companies or private equity firms.  Leveraged finance within the private capital markets in Canada is alive and well with both Canadian entities such as various groups within the chartered banks, subordinate lenders, mezzanine funds and U.S. firms looking for quality deals.  We have dealt with a number of groups in Canada and the U.S. and many are looking to write cheques between $10MM – $50MM for leveraged finance transactions.


As the normal amount of debt for a company is exceeded in leveraged finance, the nature of the situation means that an additional level of risk to the company is introduced.  As such, when involved in transactions such as acquisitions, it is important that a reasonable equity component be available and that cash flows are still healthy enough to withstand the additional pressures.


There is no shortage of available capital for established and growing businesses.  Proper selection of the type of capital depends on the situation at hand.  Until next time – Grow. Acquire. Exit.


Chris Dobbin is a chartered accountant and the owner of the Precipice Capital Group of Companies.  He arranges growth capital for business owners, management teams and private company boards and advises them on M&A and corporate divestitures.  Chris sits on the Board of Directors of the Private Capital Markets Association of Canada and has been awarded the Private Equity and Private Debt Deal of the Year Awards.   

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