Pricing Adjustment During DD

by a searcher from University of California, Santa Barbara

1 month ago

3 months ago we submitted an LOI for 4x EBITDA on an electrical engineering firm. Now we are seeing current year will likely be negative EBITDA. Curious to hear what people have done to renegotiate. Do we hold back some money for an earn out when profitability comes back? Other ideas?

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

Assuming your QoE checked the quality of financials before the dip in EBITDA, this kind of decline would require a heart-to-heart discussion with the seller. Walking away is an obvious solution, but there may be an earn-out/escrow/holdback structure that could be a win-win for both sides and keep you in the mix. Much will depend on your acquisition timeline and other deals in your pipeline.

4 weeks ago | like reply | 1 like

searcher from University of Washington Bothell - School of Business

I stated my multiple in the LOI and made it clear that we would have to adjust the price if the financials changed. That said, it's not always easy to ask the seller to lower the price. One idea is to adjust the terms of the transaction (perhaps the seller takes on a note - or a larger note - that is placed on full standby for at least 2 yrs). I do not think the SBA will do earn-outs, but they should allow for a portion of the seller note to be forgiven if certain financial benchmarks are not met (please confirm with your lender as it's been a few months since I have looked at this).

1 month ago | like reply | 0 likes

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