Am I overpaying for this industrial distribution business?

May 02, 2025

by a searcher from Lousiana State University in Baton Rouge, LA, USA

I sourced a proprietary deal through an industry contact that I know and trust. Basically industrial distribution, <10 customers, <3 vendors. High cash flow (1.3mm). Has a very lean team for business like this with a single order to cash person, a single sales VP and a ceo that works 3 hrs per week on the biz. Sales and OTC have both met with me and are willing to sign an employment agreement and non competes. The income is verifiable but there is very little by way of contracts on vendor or customer side. I know the industry very well and I am very confident I can grow the customer and vendor base. I agreed to 4X multiple because of the generous seller financing (seller retaining 19%, financing 40% forgivable on margin performance). We’ve agreed verbally on LOI, but it has not been signed yet. Industry: industrial chemicals Revenue: 9mm SDE: 1.3mm Am I overpaying? Cashflow net of debt leaves plenty for me and investing to grow.

Reply by a searcher
from Washington and Lee University in Dallas, TX, USA

From my recent experience in looking at distribution businesses, brokers are conditioning sellers to expect a###-###-#### 5x multiple or what I consider steep vs the traditional 3-4x multiple for ~$1mln SDE businesses. The seller financing and employment agreements with remaining employees aligns you for success and if you are confident that you can grow the business, a 4x multiple without excessive leverage is potentially a very good setup that you have found so congrats! One thing I would understand and it sounds like you know the industry but chemical prices can be volatile so make sure the inventory is turning over quick enough to not get burned when the cycles turns down (as it seems to be doing now in that arena). Good luck!

Reply by a searcher
from Texas A&M University in Hartford, CT, USA

In general 4x is a fine multiple assuming this is true cashflow and there are not large working capital needs or capex. And you said cashflow is good after debt service. Sounds like you have some customer and vendor concentration which may just be the nature of the industry. You also have key man risk. But at least some of that risk is offset by large forgivable seller note. You should make sure the seller equity roll still works with the recent SBA rule changes.

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