COVID Clarity on Valuations

searcher profile

August 10, 2021

by a searcher from University of New England in Sydney NSW, Australia

Question:

Currently in negotiating on the purchase of a manufacturing business based on a multiple of the last 3 years EBITDA and weighted to last 12 months as earnings over the last two years have improved significantly based on managing cost base...COVID in Sydney is now looking like threatening future earnings with hard lockdowns looking like they will be in place till Oct/Nov...

How would some of you more experienced buyers play this out with both the seller and the situation?

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commentor profile
Reply by a professional
from Harvard University in Atlanta, GA, USA
^redacted‌ I agree with Ron Buck. If they've improved margins during COVID you have two worries: 1) that trend will not continue if Covid's impact ends and 2) Covid is worse than expected and there could be downward pressure. This situation lends itself to an earn out or seller note based on###-###-#### month performance. You may even want to discuss a "covid seller note" that is forgivable for 6 months if Covid impacted earnings drop below a certain level.
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
I would focus the total valuation on the long-term prospects, but look at putting some structuring (including earnout or seller finance with forgiveness) in place to address liquidity and near-term impacts from disruption.
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