Bridging valuation gap for 1.2M EBITDA construction manufacturing biz

April 04, 2024
by a searcher in San Francisco, CA, USA
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.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I have seen some PE firms come in and pay this type of money, but it is likely they would offer that but after completing their due diligence might come back and lower the price based on adjustments (like the required CAPEX adjustment). So there is no guarantee they will end up with the $7 million.
If your client is not in a position to make this deal work, I would not advise them to stretch. When buyers stretch it is when they get hurt.
If you want someone to take a look at the financials and cash flow and provide more specific feedback on what is available on the debt side we would be more than happy to do so. You can reach me here or directly at redacted Good luck with this one.
from Stanford University in Orlando, FL, USA
Bottom line (after several months of interaction and putting an attractive, reasonable offer on the table) is that I don’t believe he’s actually ready to sell, and that the current exercise is a fishing expedition for an outsized price tag. Hope I’ve been additive here