How to Structure a Deal When the Building Kills EBITDA?

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by a searcher from Brigham Young University Hawaii
in Queen Creek, AZ, USA

1yr ago

How to Structure a Deal When the Building Kills EBITDA?

I’m evaluating a business where the valuation came in at 5.5x EBITDA, which my partners and I feel is fair. The challenge is that the owner will only sell the business if the building is included.

The problem? The owner has owned the building for years and is only paying around $9,000/month. If we were to buy the building at today’s rates, our payments would jump to $22,000/month, which would eat up nearly all of the remaining EBITDA.

We’re trying to figure out how to structure this deal so it still makes financial sense. Has anyone dealt with a similar situation? I would love to hear any creative deal structures, financing options, or terms that might help make this work.

Appreciate any insights!

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reply by a searcher 1yr ago
from Harvard University in Houston, TX, USA

Assuming you buy the building and it's the property taxes that go up? Does the seller own just the building and pay rent to a landowner, or own the building and the land?

You always need to adjust purchase price to be based off of the multiple of pro-forma* EBITDA after all effects of the transaction. So you'll probably pay higher property taxes but save on rent by owning the building. The seller should be understanding that if you buy the building you have to adjust purchase to get to the same cash flow / total purchase enterprise value that you were interested in before the building was going to be part of the deal.

reply by a lender 1yr ago
from University of Utah in Sandy, UT, USA

The cash flow of the business is potentially overstated due to the below market rents (i.e less expense equals more profits). I would consider applying market rents to the existing cash flow to see what debt it can support, Happy to talk it over. redacted orredacted.

You could also consider a seller note to bridge the gap.