Looking for advice on deal structure for specific opportunity

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August 30, 2023

by a searcher in Cincinnati, OH, USA

Looking for advice regarding possible deal structure for an opportunity on the radar. Company has a long history, retirement owner, but has been underperforming profitability. My background suggests that we can improve.

Revenue has been consistent in the $5M range for the past 3 years, but company is basically operating at breakeven net income. Broker indicated the seller understands seller financing and/or earnout will be necessary.

After the AR & AP wash out, Inventory is about $500K and the current FFE/Vehicles is another $500K.

Revenue doesn't have much concentration, but there is concentration in a couple (ie: vendors, sales team-member) other areas.

Any suggestions on deal structure to mitigate risk? Should I exclude using any bank debt and have the Seller hold everything? What amount should be S/N vs E/O? Or should I utilize bank debt, LOC, etc.? What % and/or amount would you provide as a down payment?

Happy to hear other's suggestions.

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Reply by a searcher
from University of Michigan in Detroit, MI, USA
A lot to unravel here but just focusing on the question asked - I'd recommend avoiding bank debt right now given interest rates. IMO 100 % seller note would be great if the company's CF could handle it. I'm not sure if the CF could handle it so the mix of down payment and seller financing will depend on the CF. Run some CF projections at various down payment / seller financing ratios and see what you would feel comfortable with. Start there with the seller. With that said a company operating at BE, post addbacks, doesn't seem to have much value in my opinion.
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