LOI acquisition price - static dollar value vs EBITDA multiple?
December 05, 2023
by a searcher from University of Pittsburgh in Philadelphia, PA, USA
We've recently submitted an LOI - our third to date - that offered a static dollar value for the acquisition price with the following language:
The purchase price for the Assets would be $X (which is based on
an earnings multiple of Y of 2022 adjusted EBITDA of $Z)
We got feedback from the broker that they expect that the earnings multiple is what will remain static throughout the exclusivity period, at the end of which the "final price" will be set based on LTM EBITDA. Is this standard? We've never seen this before. I understand from the sellers perspective if we are to go under LOI with a static price today, they'll lose any upside over the next 90 days of running the business. How is this normally accounted for in the LOI? To date, we've priced our offers based on performance through the acquisition period (i.e. based on LTM EBITDA of management projections through the end of the exclusivity period) but still express it as a multiple of today's LTM EBITDA.
In the case that you submit a static multiple instead of a static dollar amount, how does that work with an SBA loan if you're close to the DSCR limit? Presumably the term sheet won't wait for all of future revenues.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Your bigger issue is going to be with your SBA financing if you are going that route. The price you are paying needs to be set before closing and everything related to the approval needs to be based on that price. Any changes to the price upwards could cause the whole deal to need to be modified. If you are going to potentially have a higher price paid, you will need a date likely two weeks before closing where you will finalize the purchase price.
The larger concern though is what will the cash flow support. Most SBA lenders are going to want to hit their minimum DSCR ratios in both 2022 and on an interim basis in###-###-#### If cash flow is up and the value is too high where you are no longer meeting those ratios in 2022, that could kill the deal from an SBA lender perspective.
My recommendation would be to go back and be honest with the seller and broker about what you are trying to accomplish and let them know it will not work for you or your lender to have that be a variable number. Or set a maximum number it will not go higher than, which will need to be a number that will still work with your financing.
If you need any assistance analyzing the financing side and determining what the maximum price you can pay and still make the loan work, we are more than happy to provide that analysis. We do not charge anything to analyze deals. You can reach me here or directly at redacted Good luck with your negotiations.
from Columbia University in Dallas, TX, USA