Debt Repellent: How EBITDA Can Help Companies Balance Expenses with Growth

In the current high-rate environment, many middle-market companies face unprecedented challenges, particularly those acquired by private equity managers between 2020 and mid-2023.

These companies now grapple with soaring debt payments, often double or triple the initial amount due to rising interest rates. For those struggling to grow, this financial burden is critical. Prioritizing EBITDA has emerged as a vital strategy for overcoming these challenges.

The Leverage Dilemma

During the 30-month period when PE sponsors acquired these companies, they leveraged large amounts of debt, taking advantage of record-low interest rates. With interest rates unlikely to drop soon, these companies must seek new sources of value or risk credit downgrades or loan defaults. Boosting EBITDA is key to navigating this financial pressure.

Why Focus on EBITDA?

EBITDA provides a clear picture of a company’s health and growth potential, often more accurately than traditional metrics. An EBITDA-centric approach helps companies make strategic decisions that generate new value and cash flow. Increasing EBITDA is crucial, especially as debt burdens consume 60% to 80% of some companies’ profitability.

Strategic Steps to Boost EBITDA

In our recent article by Gary Hoover, VP of Global Private Equity Practice, details essential strategies for Private Equity firms to help their portfolio companies overcome debt challenges brought on by high interest rates.

• Increase Output and Reduce Costs: Optimize cost structures and improve operational efficiency, such as renegotiating contracts and integrating automation.
• Free Up Working Capital: Better manage cash, accounts receivable, pricing, and inventory to improve cash flow.
• Implement S&OP Strategies: Optimizing the inventory management process through demand segmentation is a key aspect of S&OP planning.

The Time to Act is Now

The high-rate environment pressures companies, with PE portfolio companies accounting for 16% of all US bankruptcy filings in 2023. By focusing on driving EBITDA higher, companies can achieve quicker, sustainable results, ensuring they thrive in this challenging landscape.

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