Thoughts on paying above market multiple on acquisition?
February 05, 2024
by a searcher from Miami University of Ohio in Lexington, KY, USA
Some color to my situation... It is in an industry I have experience. I'm geographically constrained and this is in my radius. Clean financials with strong reputation and past performance. It is a competitive situation. Seller chose me over 3 other parties even though I wasn't the highest offer. DSCR is 1.5 at current sale price. SBA has approved.
What are the long term implications of "overpaying" for a business that I should be aware of that my blinders are keeping me from seeing?
from University of California, Berkeley in San Francisco, CA, USA
I walked from a deal on Christmas eve— similar to your situation in many ways. Weird situation where we weren't under LOI, but where we were essentially in diligence. We couldn't get to a final agreement on price. I kept trying to bring them to my position based on multiple. My analysis of downside situations made me uncomfortable at the price they were asking. I was willing to stretch up some because of the circumstance, but not to what they wanted.
I think one thing I could have done to get the deal done would have been to shift the conversation from multiple to showing them the downside scenarios I was looking at. Maybe I could have brought them around if they could have seen the risks with the customer concentration and my concern about the downside better.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If I were in your shoes, I would want to be sure I was confident the business would have the sustained ability to repay the debt. Also, is there an opportunity to grow the business. If both of these items exist, again you may not be over-paying but you may be paying at the upper end of the market for this particular business. You need to look at what value you can bring and if that value in the future and your potential earnings from the business would exceed what you are paying.
Usually the biggest issue with over-paying is stressing the business cash flow. So long as you are not doing that you can make a deal work. Still not saying it is ideal, but usually a business is valued based on what someone is willing to pay for it. If there were others willing to pay close to that much, then the business might have that value. I hope this helps. Just my thoughts.