A significant part of M&A transactions are financed with debt Therefore an analysis of the combined credit rating and debt capacity is essential So how can we calculate that combined debt capacity? Well first of all we can take some kind of multiple We then multiple that by some kind of value driver and that will give us our multiple based debt capacity The kind of value driver we could use could be your combo, last 12 months or forecast EBITDA figure We then multiply that by a debt to EBITDA multiple and that will get me our debt capacity Let's look at that using some numbers Maybe we worked out that our maximum debt to last 12 months is 3 You then multiply that by your forecast combo EBITDA, in this case 1,200 And that will give you your maximum debt capacity of 3,600 So where does that multiple come from? Well the multiple is driven by the desired post deal credit rating For instance let's say we don't want our credit rating to drop post deal We can look at the experience of other companies, how much debt they were able to take on before their credit rating was affected Therefore this multiple is market driven Thus this gives us a maximum In our value driver, we're going to include synergies for forecast figures, which means our value driver ends up being acquirer EBITDA Plus target EBITDA plus SG&A synergies We then get to compare combo debt capacity to existing acquirer and target debt to calculate additional debt issued in the transaction So for instance let's say we put our acquirer and target debt together and that gave us 3,200 We've now worked out our max debt capacity is 3,600, that means we could issue 400 of debt in this acquisition Haircuts might also be applied though, if we think that the multiple that we're using is a little bit to high Maybe for our industry or for the two companies situation