Analysing Relevant History
Cash flow is the most vital consideration. Unless it is demonstrated that sufficient cash can be generated to pay the substantial amount of interest and repay loan finance when necessary, a deal is not possible.
It must be realised that the reason why the management team obtains a much higher proportion of equity than its members' contribution to the total funding is because a substantial amount of loan finance and overdraft facility is used to make the purchase. So a business which is likely to need significant injections of cash during the next few years is unsuitable for a buy-out deal.
This means that businesses in relatively mature industrial sectors are usually more suitable than those in young, high-growth and high-technology sectors, unless such a business can be managed in a way to generate cash: for example, by using distributors to stock the hardware and to install complex electronic systems which would require a substantial amount of working capital. However, in that case the distributors are making a sizeable share of the profit the company could be making for itself, and profit, unfortunately, is secondary to the need to generate sufficient cash flow to service the loan cap
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