What Are Debt Covenants? M&A Banking Due Diligence Overview

06/29/20 • 23 min

We interviewed Kelly Lamirand, Senior Vice President at KeyBank to discuss what business owners should expect from Senior Lender M&A due diligence. Among other things, Kelly discusses:

What information do senior lenders require when performing bank due diligence in an M&A transaction?
Why do banks conduct due diligence?
Common lending terms including revolver availability, cashflow recapture, and airball
Discussion of the "5 C's of Credit," Character, Capacity, Condition, Collateral, Capital
What debt levels are senior lenders comfortable with from a total debt perspective and a senior debt perspective?
What factors into the interest rate senior lenders charge? Does a bank's relationship with the private equity firm factor into pricing?
What are debt covenants and what purpose do they serve?
How do banks view growth capital expenditures vs. maintenance capital expenditures?

We interviewed Kelly Lamirand, Senior Vice President at KeyBank to discuss what business owners should expect from Senior Lender M&A due diligence. Among other things, Kelly discusses:

What information do senior lenders require when performing bank due diligence in an M&A transaction?
Why do banks conduct due diligence?
Common lending terms including revolver availability, cashflow recapture, and airball
Discussion of the "5 C's of Credit," Character, Capacity, Condition, Collateral, Capital
What debt levels are senior lenders comfortable with from a total debt perspective and a senior debt perspective?
What factors into the interest rate senior lenders charge? Does a bank's relationship with the private equity firm factor into pricing?
What are debt covenants and what purpose do they serve?
How do banks view growth capital expenditures vs. maintenance capital expenditures?

Previous Episode

What Is Working Capital And Why Is It So Important?

What is working capital and why is it so heavily negotiated in M&A transactions? Justin Thomas from Cohen & Company joined us for a deep dive into working capital to discuss how it is calculated and how it impacts the sale of businesses.
1:03 - Working capital definition
2:57 - How does working capital affect purchase price?
6:12 - How does the market most commonly calculate working capital requirements?
7:40 - Is working capital affected by a business's seasonality?
9:19 - Example working capital calculation illustrating when it would positively or negatively impact purchase price
12:23 - What is a working capital collar?
13:46 - What items are most commonly miscategorized as working capital?
15:18 - What is the goal of a working capital adjustment?
17:18 - What is the most common reason for working capital adjustments?
18:56 - How is deferred revenue viewed from a working capital perspective?

Next Episode

What To Expect From Legal Due Diligence

We interviewed Brent Pietrafese, M&A attorney from Calfee, Halter & Griswold LLP for an overview of M&A due diligence and what business owners should expect from this part of the transaction process.

What legal specialty groups are involved in due diligence?
What type of information is requested from a buyside legal team during due diligence?
What if a business owner doesn't know the answer to a legal M&A due diligence question?
Why is it important for a business owner to hire an attorney who's experienced in the M&A transaction process?
How long does legal due diligence take and who from the company needs to be involved in the process?
The importance of hiring a team of professional advisers outside of the organization to help with the sales process and due diligence
Best practices for business owners preparing for a legal due diligence process and most common issues that arise during due diligence
What are the most common factors that hold up a transaction during due diligence?
Advice for business owners entering an M&A transaction beyond preparation and organization of documents

Well Capitalized - What Are Debt Covenants? M&A Banking Due Diligence Overview

Transcript

00:00:00.000

hello and welcome to another episode of well capitalized I'm your host Bobby Kingsbury managing director at MCM Capital Partners and today we're gonna be continuing our education on the due diligence process and today we have with us kelly lamb ran from Key Bank talking about Bank diligence so Kelly thank you very much for for joining me yeah if you wouldn't mind just give us a little bit of background on yourself and sandy key and then we can start sure so Kelly lamb