No AR, asking for Earnest Money Deposit, no LOI - straight to APA???
May 06, 2022
by a searcher in Tampa, FL, USA
How common on a small ($1.3m EV) financial buyer-type deal is it to have AR excluded, include Earnest Money Deposit, and move straight from buyer/seller call to APA?
IOI, LOI, DD, APA --> all part of the dating process and now I feel like, maybe all of that is a time and process killer for such a small deal in this case.
AR/AP - always felt similar to gas in the tank for a new car you just bought and drove off the lot. For this small of a deal, wondering if just not how it's handled in this neck of the woods.
EMD - seems more RE transaction related to me but I can also see how it ties into moving straight to the APA and demonstrating commitment on my end.
I almost feel like I am getting taken for a ride but at the same time can see the other side's point.
Business has consistent $1.2m Annual Rev, $450k SDE with ~$250k in land included.
from Wake Forest University in Winston-Salem, NC, USA
As for the AR/WC: It depends on the size and the data source. According to the average of the last 4 quarters of the IBBA/M&A Source Market Pulse: 20% of deals under $500k included working capital, 17% $500k - $1 mm, 31% $1 mm - $2 mm, 39% $2 mm - $5 mm, and 75% $5 mm - $50 mm. As far as the data source used in deriving comparable metrics: in BizComps the price component (numerator) explicitly excludes inventory, AR, and AP; PeerComps includes "normal inventory" but explicitly excludes AR and AP in the numerator; DealStats depends on the specific transactions and can only be ascertained by looking at the "All Available Fields" version of the download. So the trick is to know which data source is being referred to (or used) and not mix and match. When AR/NWC not included, the standard practice is for lenders to lend it as either permanent working capital and/or a LOC.
As for EMD: Once you put yourself in the seller's shoes, it makes sense (See related post: https://www.searchfunder.com/post/earnest-money-deposit). Even when representing buyers, we recommend their offer includes an EMD (with the right protections -- refundable during a set period, placed in a trust account, etc.). EMDs starts to taper off above $2mm in EBITDA. and as mentioned in other posts, the correlation between a buyer that puts in an EMD and actually closes is quite high, and it does help the seller separate buyers when several are interested. Buyer type and experience is also a factor. A PE firm or strategic coming in as a buyer with a portfolio of companies, track record, and balance sheet is very different (and would not be expected to put in an EMD) from an individual (whether structured as an LLC or not) with zero to a few deals under their belt and a limited balance sheet. Different risk profiles. And if it makes sense for CRE (limited confidentiality needs, lower risk to seller overall, larger pool of buyers, not a living breathing entity like a business), then it really makes sense for a business.
from University of Southern California in North Palm Beach, FL, USA
Don’t pay to peek.
Never make an earnest money deposit or sign a purchase contract—no matter how many contingencies are in it—before you and your advisors have analyzed the company, obtained an expert opinion of value and defined alternative terms of purchase.
If you doubt the wisdom of this advice, make an offer on a business you don’t really care about. Later, when you think you know what it is worth, try explaining to the seller why your offer must change.