Overpriced Business Ideas?

by a searcher from New York University

2 months ago

Currently looking at a really great business that checks a lot of boxes for me, but Sellers are not budging off a price that is just too high for it.  They are looking for###-###-#### 6m and it's probably worth###-###-#### 5m really.  I understand they are hoping PE Firm swoops in and doesn't care about paying###-###-#### 6X EBITDA, but that is just not realistic for an individual buyer using an SBA loan (ie. Me).  Are there any suggestions of ways to bridge the gap to not over tax the cash flow of the business, but still maybe get them closer to where they are looking to be based on future performance or something along those lines?  Understand they would have to be open to it, but I honestly would like to have some ideas to propose and I don't know what is possible/allowed/smart, etc.  Thanks so much in advance!

2 likes
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24 comments

searcher from University of Virginia-Darden - Darden School of Business

I ultimately walked away in a similar situation. I agree that earnouts and seller notes can effectively bridge valuation gaps. In fact, I've seen deals where the seller note and earnout covered >50% of the EV. However, it's important to recognize the significant risks involved if combining a senior note, a seller note, and an earnout (a contingent liability). Depending on the business' stability, a substantial equity injection might be necessary. This is probably one of the reasons why such structures are not commonly used by individual investors.

2 months ago | like reply | 0 likes

searcher from The University of Michigan - Stephen M. Ross School of Business

I was in a similar situation where I just ended up walking away. No regrets! Based on this scenario, I don't see the seller moving too far from where they are. Once it becomes a psychological decision then they will harden their position even more.

2 months ago | like reply | 0 likes

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