Buying during a pull back?

searcher profile

December 12, 2024

by a searcher from The University of Arizona - Eller College of Management in Gilbert, AZ, USA

Hello Searchfunder,

I'm interested in a business that meets almost all of my key criteria but the TTM for the last 12 months is down about 20% yoy, but still over my sde criteria. This was after two years of banner sales. The numbers are on par with 21 and up to 19. All that said, should I just move on as this drop is likely a sign of things to come? If I decide to move forward with an offer, how do you negotiate a price on a business that clearly has some great potential but is down. My initial thought is buy based on TTM, but tie the seller note as a reverse earn out with forgiveness clauses to be sba compliant.
Open to thoughts on how others have approached deals like this.

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commentor profile
Reply by an intermediary
from Babson College in Boston, MA, USA
The answer to this really depends on what the driver of the growth was leading to record revenues and then what triggered the decline. If the sellers rode a wave of one time fortune (entirely possible), it doesn’t mean it’s a bad business it just means you don’t want to pay off of the peak. If you’ll have to rebuild the growth of revenue to regain that high I also would advise against an earn out structure. The answers to these types of questions are so heavily dependent on the facts and circumstances. I’d suggest you have you’re advisors familiar with the deal provide you with the relevant advise. Getting hypothetical suggestions from here can be helpful but also misleading, given their not anchored in full context of the deal.
commentor profile
Reply by a searcher
from University of Virginia in Hong Kong
My approach is to first build own independent view about the future.... dig in to understand the root causes of the recent drop and assess possibility to reverse the slide.

If the above gives me confidence, then I'd value at TTM and earn out on top, as you are thinking and Ali suggests above. If the timing of the recovery uncertain, I'd try to negotiate a lower guaranteed payment and a higher contingent/earn out.

But ultimately, building independent view on future is important for me.
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