How would you value & structure this deal?
October 24, 2023
by a searcher in Cincinnati, OH, USA
Well established company. Margins were negatively impacted by COGS in '22. TTM appears to show a bounce back and growth from added bandwidth. Recent impact makes bank financing a challenge.
Seller is willing to consider a down payment + earnout.
###-###-#### ###-###-#### TTM 2023p 2024p 2025p 2026p
Revenue###-###-#### ###-###-#### ###-###-#### ###-###-#### ###-###-#### ###-###-####
Margin###-###-#### ###-###-#### ###-###-#### ###-###-#### ###-###-#### 3990
Margin % 34% 37% 26% 35% 36% 36% 38% 39%
Adj EBITDA###-###-#### ###-###-#### 900 ###-###-#### ###-###-#### 1.780
Major Balance Sheet Items
AR###-###-#### 900
Inventory###-###-####
How would you value and structure using this information at this time?
from University of Pennsylvania in Miami, FL, USA
Without knowing anything about the business, here are a few more thoughts:
- This business has a ~5% EBITDA margin that seems to have a fair amount of volatility. Don't love that and especially don't love that with a lot of deal-related debt on the balance sheet. Sounds like a stressful ride which makes me skittish.
- They're running about $1.5m in opex. How much fat is there to cut? If you can get in and cut out a bunch of expenses, that could be a fast way to create some room on the P&L, but you would need to be very confident in this.
- I'd want to understand what "adjustments" were made to Adjusted EBITDA. Is the seller's comp included? If you re-cast the P&L post-acquisition with all the expenses required for you to run the business, are you anywhere close to the current opex figures? If your expenses will be higher, a tough acquisition just got a lot tougher.
- Nevertheless, without knowing anything else I'd probably value the business at 3-4X historical adjusted EBITDA ($360K), which gets you to $1.1-1.4M.
- Seller may want to be compensated for the AR and inventory - this is tough without knowing more about it - what's the age distribution of the AR and inventory and likelihood of realizing any value from it? Is this simply ordinary for a business performing as it is, so you're in principle buying these when you buy the business? Ultimately it's going to be a negotiation informed by deep due diligence on these items. I don't know much about this topic and you need to get advice from experts to make sure you agree to reasonable terms.
- You may be able to get some SBA financing on the basis of the TTM figures, but it could be tough. Consult an SBA lender.
- Better approach, if the seller is willing, may be to negotiate a mix of seller note and royalty/earnout that creates upside if the growth projections materialize. This may be a way to bridge the past reality with the seller's future projections.
- A potential deal could be $1.5M valuation with (1) a $750K seller note paid in $150K installments over 5 years, (2) 4% of gross profits over the same 5 years (worth ~$500K based on the 2023 gross profit projection), and (3) a $250K cash payment at close.
- The earnout portion provides protection on both sides of the deal. Try to negotiate zero interest on the seller note by positioning it instead as a series of installment payments, not a loan. You could try (good luck) to get the seller note paid out over a longer period of time or a shorter period with a balloon payment at the end to reduce the payment amount in the early years.
- If the seller will stay on for 1-2 years post-close, change part of the seller note to guaranteed comp, which allows you to get "credit" in the deal for the guaranteed comp and in effect reduce the valuation.
from University of South Carolina in Great Falls, VA, USA
Valuation Methodology For valuation, one common approach is the Discounted Cash Flow (DCF) model. However, given the volatility in the company's recent EBITDA, it might be more prudent to rely on an EBITDA multiple approach. EBITDA Multiple: The TTM Adjusted EBITDA is 900. Assuming an industry-average EBITDA multiple of 6x to 8x, we get: Lower Range = 900 x 6 = $5,400 Upper Range = 900 x 8 = $7,200 These figures provide a valuation range for the company. Risks and Adjustments Because the 2022 EBITDA was negative, potential buyers might argue for a lower multiple. A buyer may also look at weighted average EBITDA over the last few years to dampen the effect of one-time fluctuations. Deal Structure Considering the seller's willingness for a down payment plus earnout, the deal could be structured as follows: Down Payment: A percentage of the lower range of the valuation, say 50% of $5,400, would be $2,700. Earnout: The remaining balance can be structured as an earnout over a 2-3 year period. The earnout could be tied to performance metrics such as reaching specific EBITDA or Revenue milestones. Terms and Conditions: Clauses could be included to adjust the earnout based on actual performance, either positively or negatively. Example Earnout Structure Year 1: 20% of remaining balance if EBITDA target of $1,130 is met. Year 2: 30% of remaining balance if EBITDA target of $1,280 is met. Year 3: 50% of remaining balance if EBITDA target of $1,610 is met. Feasibility (FEA) The suggested down payment is substantial enough to provide immediate liquidity for the seller. The earnout structure allows for adjustments and reduces the buyer's upfront financial risk. Risk Assessment (RISK) in Deal Structure One major risk for the buyer is the earnout not being met, which might require renegotiation. For the seller, the risk lies in depending on future performance for the full valuation.