A Primer On Recurring Revenue Financings

An acquisition target in the technology space may still be in the early stages of development, and have significant growth expenditures that result in low or negative EBITDA. As M&A activity in the technology space continues to grow, an increasing number of private equity sponsors are utilizing recurring revenue financings to partly finance these types of acquisitions.

The terms of recurring revenue financings generally converge on the same central thesis - an acknowledgment from the lenders that a borrower in this type of financing is likely generating a de minimis amount of positive cash flow while in growth mode, in exchange for an acknowledgment by the borrower and its related private equity sponsor that these types of financings create more credit risk than a traditional cash flow financing. In furtherance of that central thesis, in a recurring revenue financing, for a period of time after the closing date, a borrower will be subject to financial covenants