What is Hybrid Capital and Revenue-Based Financing?

About the Episode

Hybrid capital, or revenue-based financing, might be the solution for a middle-market business owner seeking capital to grow while still maintaining control of their company’s strategic direction. Neil Johnson explains how this model of revenue-based financing works. This detailed discussion covers who can benefit from this approach, how the interest rate flows, how lending multiples are calculated, unitranche debt, and the debt-like and private equity-like features built into this hybrid model of financing.

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“The best source of capital is internally sourced profits – you keep control of your company that way. If you are looking for outside capital, look at the alternatives. Don’t always assume it will come from the banks. There are alternatives out there, so check your options.” 

Neil Johnson

In this Episode

2:42 What is hybrid capital?
4:12 How does this type of financing work? What types of businesses is it geared toward?
14:06 What is the cost of capital concept?
18:33 Where did the idea of hybrid capital and revenue-based financing come from?
21:41 What does Duke Royalty look for in the companies they work with?
24:10 What are tranches, and how do different tranches work in financing?
29:58 What is the difference between unitranche debt and working with a mezzanine lender?
33:59 What is the underwriting process, and how long does the process typically take?
36:44 What is the debt-coverage ratio Duke Royalty looks for when they are considering lending capital to a company? How does this relate to the company’s EBITDA multiple?
38:48 What should entrepreneurs know about lending multiples?
43:23 How common is revenue-based financing in the U.S.?
46:34 Advice to entrepreneurs about financing options to fund growth in their business.

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Resources Mentioned in This Episode

Terms Mentioned in This Episode

  • MBO: A management buyout
  • Mezzanine Lender: Provides financing between senior debt and equity.
  • Unitranche Debt: Blended loan combining senior and subordinated debt.
  • SaaS Financing: Financing option specifically designed for software-as-a-service companies or companies that operate on a subscription-based model with recurring revenue.

Meet Our Guest

Neil Johnson

Neil Johnson

Acquisition Entrepreneur | Finance Expert

Neil Johnson is a renowned finance expert with over 30 years of experience in investment banking and research analysis in capital markets in both Canada and the UK. He is responsible for leading deal origination for Duke Royalty. This $300 million publicly traded company offers an alternative financing investment option for middle-market entrepreneurs seeking capital to fund growth.

Neil speaks about alternative finance, business operations, financing options for private and public companies, and how good CEOs can buy and own the business they run through a management buyout in partnership with Duke. He has played an instrumental role in the growth and success of companies, raising over $5 billion in funding for hundreds of businesses during his tenure as European Head of Investment Banking at Canaccord Genuity.

Location Location: Toronto, Canada

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