How to value / structure deal with high AR vs EBITDA?

searcher profile

November 26, 2024

by a searcher in Toronto, ON, Canada

I am looking at a deal now where the EBITDA is ~$1.5M on $15M of revenue but the AR is almost $5M and AP is only $1M. Almost no historical bad debt, just a consistently longer collections cycle. There's also about $2M of inventory. I was planning to offer 4x EBITDA which is above industry average for this space and include inventory in that, but not sure if it's realistic to expect an AR/AP NWC peg to be included as well given it's another $3M. However, without the AR, it would be nearly impossible to make the deal work and have the cash to operate the business.

If others have encountered this situation and have ideas for how to structure the deal, would appreciate any ideas!

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Reply by a searcher
from The University of Chicago in Nashville, TN, USA
Do you have access to an AR aging report? I would want to make sure that the reason they don't have bad debt is because they don't acknowledge it, which would explain why the average age of AR keeps getting longer. I would almost be surprised if that wasn't the case. Either way, they will need some explanation as to why it keeps getting longer.

Stick to your ask around AR being included, if anything you could "give" them the most aged AR during negotiation. As you said, it isn't feasible without the AR.
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Reply by a searcher
from Saint Louis University in St. Louis, MO, USA
Get reps and warrants tied to AR and an amazing QoE provider.
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