$1M revenue biz with negative net incomes but positive SDE (100% add-backs) - UPDATE

June 02, 2024

by a searcher from Biola University in North Tustin, CA, USA

**UPDATE** Great call with seller, pretty cool dude. My suspicion of it being a lifestyle business (by choice) confirmed. Wants to spend more time traveling with wife (she wants him to slow down, so motivated). Still passionate about the business and wants to see it continue in good hands (more motivation). Lots of good ideas for growth but just didn’t want to invest redacted

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Looking for feedback from fellow searchers and investors on general impressions and what type of multiple this might be worth.

Looking for feedback from lenders on their general impressions and if any potential issues in funding, e.g. DSCR, NWC, etc.

I don’t have detailed financials yet but suspect probably a lifestyle business. Have first call with seller next week to chat. I like the market/applications and can see potential to grow beyond luxury residential into disabled and elderly (age-in-place and commercial facilities) as well as expand geographically but think $900K asking is too high (maybe more like $650K) and concerned may be difficult to fund.

Thanks!

Reply by a searcher
in Edmonton, AB, Canada

Given this amount of Revenue Scott, I will assume you are going to be operating this business if you buy it. Negative Net Incomes is definitely part of the reason we all do an EBITDA calculation to find the true earnings of the business, as I'm sure you know.
You haven't indicated how you will be buying this, whether you are putting a substantial amount of your own unleveraged funds into this business or whether you plan on a 100% Leverage Buy Out, as that will definitely impact your DSCR.
If doing the latter, you may be best off using a 1.50 DSCR rate as your threshold, even though some lenders are at 1.25.

The multiple will be determined by the Transfer of Value or the Strength of its Goodwill meaning its Customer Value Drivers, Employee Value Drivers, Structural Value Drivers and its Social Value Drivers. Usually they are not very high in businesses of this revenue size, meaning it would be unlikely your multiple would even reach 3x.

With regard to price when its too high, you have to ask how flexible they are on providing terms, or Amount of Seller Financing provided.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would be more than happy to look at the deal and have a conversation from a financing perspective. We certainly have done transactions with negative net income but positive adjusted EBITDA. I think the key here is that if they are added the seller salary back you also need to adjust for any new salary you will need to take post acquisition. So the add-back of salary really only works if they are pulling all of the income out via salary. If they are taking a reasonable salary that you would take, then the business might not have much real cash flow on an adjusted EBITDA basis as adjusted EBITDA should take into account your new salary.

You can reach me here or directly at redacted if you would like to discuss. Good luck.

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