How Much Should I Borrow?

3 times annualized revenues is a reasonable debt limit for most small billboard companies.  Here's why.

I tell borrowers to limit debt to at a level where their plant will be worth more than debt even if revenues drop and multiples contract during a recession.  Industry revenues declined 20% during the 2008-2009 recession.  Billboard values have averaged 5 times revenues but can be expected to drop to 4 times gross revenue during a recession.

If you borrow no more than 3 times annualized revenue against your boards you will be able to sustain a 20% drop in revenues during a recession and still have enough value in your plant at a 4 times revenue sale multiple to cover your debt.

Let's assume your plant is generating $20,000/month in gross revenue or $240,000/year.  At a 5 times revenue multiple your plant is worth $1.2 million.  You take a loan for $720,000 or three times gross revenue.  A recession hits.  Your revenues drop 20% to $192,000.  Valuation multiples contract from 5 times revenues to 4 times revenues.  Your plant is now worth $768,000.  This is not a fun state of affairs but you still have enough value in your plant to be able to cover your debt and have a little left over. 

3 times annualized revenue is too high if you are in the 8 sheet business (valuations are lower), if you have short term land leases or if you are in the out-of-home business where you rely on short term contracts with transit agencies or municipalities. 1-2 times annual revenue is a better debt limit.