Structuring a deal for a growing business

November 23, 2021

by a searcher from Ohio State University in United States

I'm in discussions on a luxury window/door company in a booming geographic market. I see a lot of opportunities: the seller is hands-off, sales team is not actively managed, margins can be improved to better meet industry benchmarks, geographic expansion, existing builds as opposed to only new construction, commercial expansion etc.

The business has experienced a doubling in net income from the trailing two years to present year (annualized). As such, it has been difficult to make an attractive offer that is financeable through lenders. I'm also a little puzzled as to why a seller wouldn't just hire a business manager and maintain ownership (he cites that he wants to focus on his other business and take chips off the table).

Long story short: seller is asking $6M for 2021 net income of $1.7M, whereas 2019 and 2020 have adjusted EBITDA of $650-700K. How can I structure this deal that makes sense? Am I getting into a mess?

My thoughts are 10% down by buyer, 20% forgivable seller's note contingent on hitting 2021 revenue in 2022 and 2023, and the remaining amount financed through lenders - IF we can agree.

Reply by a searcher
from Pennsylvania State University in Atlanta, GA, USA

Sounds like this business may have benefited from the recent growth in housing starts and renovations, and is now trying to capitalize on those recent earnings. During diligence, be sure to review 1) whether or not you feel this demand is likely to continue (if its new build-based, then what is the pipeline for next 6 months / how much are his customers continuing to build now that rates have ticked up....the amount of houses that his builder customers are starting now implies this company's pipeline in 3-6 months), and 2) whether the owner managed this business for a sale during the last year. On the latter point, what I mean is did the seller under-spend on tools, equipment maintenance, etc. versus previous periods - very common for owners to take this mindset in the year they intend to sell, which means the buyer is then forced to overspend in his first year of ownership. Look at whether these variable costs as a % of sales have declined this year; if so, pro forma earnings accordingly. Overall, I personally don't think earnings profiles like this are any automatic "no", I think they just need to be reviewed and scrutinized more closely.

Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

You'll need Forgivable Seller Note tied to historical performance for SBA. See if bank will accept TTM as historical. If so, go for "their price, your terms". You'll probably need more attributed to the forgivable portion. Think if business drops to 2020 levels, does it still meet DSCR? 4.5x $0.7M= $3.15M... only 52.5% of current asking.

Ask for the 5% full standby too. Sell them on Tax benefits of the seller note(s), not taking whole hit in one year.

Is there Real Estate involved? This could give you some flexibility to introduce this as part of deal.

Sounds like Seller wanting to take advantage of boom year. You could also flip script and propose he hires you as the manager you mentioned, with a contract to buy after 2 years (penalties if seller reneges); he gets 2x more years of, say 2021, at $1.7 x 2 = $3.4M. You take out loan in year 3 start for $2.6M. Seller walks away in 2 years with his 6x (if company performs), you buy at manageable multiple, but with delay.

Please do an update to post topic with how Seller receives your Offer?

+3 more replies.

Join the discussion