Bridging valuation gap for 1.2M EBITDA construction manufacturing biz

Hi all,

I am advising for a team of two searchers, who are looking at a heavy manufacturing business located in the southwest US.

The business manufactures products that are directly used in construction, and save builders a few valuable hours/days in-situ, and charge a premium for their product given time saved and stress evaded.

The basics of the biz - 1.3M EBITDA, with a drop in 2023, when it did 1.7M in 2022, and 1.2M in 2021.

They constructed a greenfield factory 10 years ago, with new cranes and a whole new floor plan with efficient workflow , and replicating that factory today (ignoring land costs) would be around 2-3M as per the seller. They haven’t spent any major capex in the maintenance as most of the factory is new, and the existing machinery is pretty well maintained/low hassle.

Our reasoning for actual cash flow, after an operator salary of 100k (minimum the lender wants to take, for one searcher), and 150k in deferred capex that will surely catch up 3-5 years (when the factory is 15y old) would bring down the usable cash flow to 1.05M/y

The seller owns the land, and is charging himself a fair market rate which will continue.

The seller’s representative initially said he got an offer for 7x EBITDA, which for some reason they didn’t go forward with. They seem like really rational operators, a bit aggressive with pricing but overall fair business owners, and asked for a 7M price without the real estate (which is valued at 2M approx).

Buyers don’t see a price above 4.8M penciling out, given the cyclical nature of the industry, increasing shipping costs which narrows their profitable service area (products are big and bulky), and lack of awareness in the construction industry about the win-win of using their product - necessitating additional outreach to educate potential customers and a higher sales cycle.

Buyers have asked me if they are missing something and I wanted to rely on the wider audience to uncover any blind spots. My take is that there are no banks that will lend against this deal, unless there is a huge equity investor (which would dilute buyers equity drastically)

Seller’s team has threatened to go with a strategic buyer if buyers don’t offer 7M, all cash and is of the opinion that a strategic buyer will immediately snatch up this opportunity if buyers aren’t competitive.