How to structure a deal with tremendous recent growth?

searcher profile

May 29, 2024

by a searcher in Cincinnati, OH, USA

Company has had tremendous growth in recent years, along with key management turnover. How would you structure offer based on the recent trends while remaining with the SBA requirements?

 Revenue | Adjusted EBITDA

'21: $2.7m | $500K '22: $4.5m | $1.3m '23: $4.7m | $1.7m

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commentor profile
Reply by a professional
from Northwestern University in Southborough, MA, USA
Depending on the unit economics, this may not be the growth it looks like on a percentage basis. I'd dig deeper on the reasons for the growth - did they just find market fit for their product? Did they raise prices? How has headcount grown with the new revenue? Was there a challenge they overcame that they were fighting in 2020 that unlocked growth? I really think it's less about the growth percentage and more about what drove the growth.

In terms of structuring - that's up to you. Are you comfortable with the reasons behind the growth? Structure as you would normally (and maybe try to average the revenue and profits over the last 3 years to give you a bit of preferred pricing on any multiples discussed). If you are uncomfortable with the reasons for the growth, offer the seller an earnout that will meet her/his/their expected growth payout, but also protect you if their assumptions and expectations end up not being correct.

Good luck!
commentor profile
Reply by a searcher
from Ryerson University in Toronto, ON, Canada
I am evaluating a deal in a similar circumstance - it has grown 50% in 2024 YTD, and after much back and forth, they countered with: 4.3X based on TTM with 2.8X in cash, and the remaining balance 50/50 seller note and earnout. The seller note is interest-only for first two years and can be "paused" if profits fall back to the###-###-#### levels; the earnout is tied to gross profit, and if it falls back to###-###-#### GP levels, then the earnout amount that year would be reduced by the amount of the "fall".
Wondering if this is a good deal, in light of what was said in other comments regarding the forgiveability of the note portion to de-risk the situation?
Thanks in advance
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