Does anyone have experience buying companies with multiple years of losses?
October 22, 2022
by a searcher in Toronto, ON, Canada
I’m looking at a large company with $50M+ in annual revenues, that has been losing money 4 out of the last 5 years due to low gross profit margins. I know there are other ways to value such a business and want to understand how.Additionally what are some smart or creative ways I might structure a deal to purchase the business?
from Tufts University in Jersey City, NJ, USA
Two things that you can use (and potentially combine) are "normalized margins" and "earn out". For normalized margins, you could potentially bid off of some EBITDA figure that sits between your expected future margins after you've fixed up the business and its current margins, i.e. if margins are -1% today and you think you could get them to 5% in a couple of years, then you could presumably bid on a multiple of 1-2% EBITDA margin while still capturing a good amount of the value growth for yourself. You could also deliver value via an earn-out. The seller might not like the idea of some or all of their return for the sale being delayed and unsecured, but they may have limited options as the owners of an unprofitable business.
The big question to ask yourself is, "should I"? If your intent was to buy a business on the basis of multiple of EBITDA and a business' current EBITDA is zero or negative, that should be a pause point where you need to seriously weigh whether it is the right acquisition. The business is losing money and, barring incompetent or absentee owners, is losing money in spite of the efforts of its owners to correct that issue. You should seriously ask yourself whether you've got a rock-solid plan to identify and correct the issues that are causing the business to lose money, and whether there's something you're missing in your assumption that you can turn things around (again - something that the current owners likely would have done themselves if it was a simple fix). Low GP margins may be especially challenging to address in an inflationary market, so economic tailwinds should also be taken into account. You can value this business as arbitrarily high as you like and back into a rationale for it. Again, the question is: should you?
from University of Glasgow in Glasgow, UK