Section 5.12 · seven scenarios
Stress tests
Each scenario is applied to the funded structure at the target price of £1,560,000. Debt service cover is what moves. The equity return barely does, and that asymmetry is the finding.
Scenarios run
7
All at £1,560,000
Cover breaches
3
Below the 1.5× floor
Return breaches
0
All clear 25%
Worst cover
1.01×
Working capital shock
Every scenario passes the return test and three fail the cover test. That is not a modelling quirk. Equity return is driven by the entry multiple, which no operating shock changes. Debt service cover is driven by cash in the year it is needed, which every operating shock changes immediately.
Underwriting this deal on IRR alone would show seven green rows. The mandate's 1.5× cover floor is what carries the risk signal here.
Scenario results
| Scenario | Year 1 EBITDA | CADS | Debt service | DSCR | Base IRR | Result |
|---|---|---|---|---|---|---|
| Base case | 585,200 | 390,825 | 219,700 | 1.78× | 65.3% | Pass |
| EBITDA down 10%, held for five years | 526,680 | 353,187 | 219,700 | 1.61× | 55.9% | Pass |
| EBITDA down 20%, held for five years | 468,160 | 315,512 | 219,700 | 1.44× | 46.1% | Cover breach |
| Largest customer lost, not replaced | 433,600 | 308,250 | 219,700 | 1.40× | 44.0% | Cover breach |
| Interest rate up 300 basis points | 585,200 | 396,675 | 235,636 | 1.68× | 62.6% | Pass |
| Working capital shock, debtor days 55.6 to 70.6 | 585,200 | 221,525 | 219,700 | 1.01× | 52.9% | Cover breach |
| Combined: EBITDA down 10% and rates up 200bp | 526,680 | 357,087 | 230,256 | 1.55× | 54.8% | Pass, thin |
| Owner replacement cost understated by half | 549,200 | 367,581 | 219,700 | 1.67× | 60.2% | Pass |
Operating shocks are applied for the full five years, not for one. A one-year dip that recovers would show a cover breach in year 1 and nothing else, which understates a structural problem and overstates a temporary one.
Cover against the floor
Bar length is DSCR against a 1.78× base. The floor sits at 84% of base cover, so headroom is 16% of cash, not 16% of profit.
Reverse stress test
Rather than asking what a given shock does, this asks how large a shock the structure survives.
| Question | EBITDA | Fall from normalised |
|---|---|---|
| EBITDA at which cover reaches the 1.5× floor | 490,200 | −16.2% |
| EBITDA at which cover reaches 1.25× | 404,800 | −30.8% |
| EBITDA at which cover reaches 1.00× | 319,300 | −45.4% |
| Revenue loss equal to a 16.2% EBITDA fall | — | −11.5% |
An 11.5% revenue loss breaches the cover floor. The largest customer is 18.4% of revenue. One account is therefore larger than the entire cover headroom, which is the single most useful sentence on this screen.
What each breach implies for the offer
| Breach | Likelihood signal | Condition it puts on the offer |
|---|---|---|
| EBITDA down 20% | No historic precedent in the three filed years. Growth in every year. | None beyond ordinary warranties. Recorded, not acted on. |
| Largest customer lost | Contract expiry ladder is not supplied. Cannot be assessed. | Contract schedule with expiry dates and notice periods becomes a condition of any offer. A retention or earn-out tied to the top account should be considered. |
| Working capital shock | Debtor days already 55.6 against 44.2 creditor days. The gap is structural. | A committed working capital facility of at least £200,000 must be in place at completion. Without it a single slow quarter breaches cover. |
The platform proposes conditions. It does not price them, does not send them, and does not contact the broker. That routes through the approval gate.
Method and limits
What is held constant
- Capital structure and debt terms, except in the rate scenarios
- Maintenance capex as a share of EBITDA
- Exit multiple at the entry multiple of 3.4×
- Tax rate and interest relief treatment
- Purchase price at the target of £1,560,000
What the tests do not cover
- Correlation between shocks. Losing a large account and a rate rise in the same year is not modelled as one scenario beyond the combined case shown.
- Management response. No cost reduction is credited in any downside.
- Covenant structure. No lender covenant package has been seen, so no covenant test is modelled, only the mandate floor.
- Refinancing risk at the end of the senior term.
- Legal, regulatory and dilapidations exposure. Dilapidations remain unquantified.
AcquiScope produces analysis and modelling, not regulated investment advice. Scenarios are illustrative, not exhaustive, and are run against an invented business. Real underwriting requires lender terms, a contract schedule and professional due diligence.