6-8x valuation for niche specialty distributor?

searcher profile

December 03, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Tampa, FL, USA

Self funded searcher looking at a proprietary business on West Coast in the distribution space. The business distributes high spec, high margin products, does about $5.5mm top line with ~$1.1mm SDE. No customer concentration, consistent sales and margin (20% net), been around >10 years, sticky customers but no contracts. Owner wants a 6-8x valuation.

What valuation multiples are folks seeing for these types of businesses?

What thoughts can you share on creative structures to bridge a valuation gap?

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commentor profile
Reply by a searcher
from INSEAD in Calgary, AB, Canada
Hey Stefan, I just went through a deal where the seller wanted this type of multiple and we got there with some creative deal structure & lots of back and forth. Then during DD we found a bunch of hair and it immediately put the deal in a high risk situation. The seller was unwilling to make adjustments to address the hair so we let the LOI expire.

If the seller wants 6-8 x SDE then that works out to 9-10x on EBITDA (loose math)
Unless you have a super unfair advantage on day 1 or lots of industry experience there wont be lots of buffer for "unforseen" things that may pop up.

Best way to bridge the gaps are contingent mechanisms. Forgivable seller note, earn out, maybe it is an high salary position as a way to get him extra dollars.

My sense is keep pulling the string till you have enough info to develop some intuition, talk to some experts in the industry and assess where the holes and opportunities are. Roll up, declining or growing industry, is competition growing or shrinking etc.

Good luck
commentor profile
Reply by a searcher
in Rindge, NH 03461, USA
The short answer is that the seller is smoking some good stuff. LOL Unless he can attract PE firms with some crazy fast scaling concept (highly unlikely) then he is going to sell to someone using SBA debt to finance the purchase and as Ben mentioned you can only go to about 4.5x while meeting the DSCR requirements. So anything above that has to be seller financing on full stand by or roll over equity (but limited to 19% before seller will need to PG the SBA loan). Theoretically you could get there, but why would you want to?? Businesses this size typically sell for 3-4x. So paying 6-8x would unwise unless you had some magic wand to instantly increase the value/profits, etc. Seller needs a dose of reality, unfortunately for you that usually takes time.
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