Valuation Advice - Manufacturer

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by a searcher from University of Virginia-Darden - Darden School of Business
in Walla Walla, WA 99362, USA

1yr ago

Valuation Advice - Manufacturer

Here's the basic context:
- Manufacturer focused on a industry that is currently challenged
- EBITDA in 22 and 23 of ~$1m
- Under LOI beginning of the year, deal failed, owner had health issues
- Revenue down ~50% for the year, EBITDA down to ~$200k, partially due to sale distractions and owner issues
- Salable inventory in access of $1m

Owner needs an exit and is considering a fully financed sale. He's looking for a value in the $2m range, which would be a steal on $1m of EBITDA but is rich on $2ook. A simple multiple of EBITDA here ignores part of the story. How would you think about value?

Thank you all for your insights!

1 Like

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reply by a searcher 1yr ago
from Simon Fraser University in Vancouver, BC, Canada

For me there is likely more enticing opportunities out there, but if they want a deal to be done, then structuring it with a 5 year Vendor Note for $600k for the base business and structure an earn-out for 3 years at $1.4 million based on getting back up to $1 million per year in EBITDA could work. The earn-outs would also be financed with their own 5 year vendor notes instead of paid immediately. This aligns incentives to ensure everyone is working to get the business back to the profitability levels expected, but if profitability/ earn-out is not earned, then Paul's only responsible for paying the $600k Vendor Note.

reply by a searcher 1yr ago
from Concordia University in Toronto, ON, Canada

Then I've narrowly escaped this catastrophe ;) Good that he didn't accept my earn-out proposal.
A few points: 1) This is a turnaround opportunity then and you should have a well thought recovery strategy. It will need further capital as it recovers and grows and of course you will spend a lot of time and efforts to take it back to track. 2) In addition to NWC (or inventory) you also need to consider the fixed assets included that are enough to generate $1M EBITDA, perhaps FMW of $1M or so. 3) In a manufacturing turnaround case you sure pay more than the cash flow multiple, but less than the FMV of the assets. And the seller should be more flexible about the transaction and payment terms. So try to negotiate as much as possible. 4) The owner having health issues may leave soon after the closing. You need to have a good understanding of their different market bases, product lines and revenue streams. 5) While the GM looks to be in the range of 30%-35%, and recovery of sales may take some time, your short-term focus should be on cost cutting and taking operating/admin expenses under control. 6) Long-term strategy should be diversifying the services to other industries.
Hope above is helpful.