Valuation for 2021 EBITDA higher than other years

May 27, 2022

by a searcher in Chicago, IL, USA

Hello Searchers!

I have a deal I am negotiating in the Pet industry that I would like some help with. If anyone has navigated a similar situation I would appreciate your help and insight.

A business I am looking to purchase has achieved between $500k - $600k for 2018, 2019 and 2020, but the 2021 year was $997,000.
I offered a 3.5 x multiple based on the average of the 4 years. The owner is looking for 3.75 x based on the 2021 numbers.

How can I handle the negotiation so that it is fair for me and the seller?

Thank you.

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Reply by a searcher
from North Carolina State University in Sykesville, MD 21784, USA

Not sure of your situation, but it sounds like the issue is you getting comfortable with the growth. I would be trying to find out what drove it, and do you expect to be able to sustain it? As others have said, 3.75x is a reasonable multiple. Being 5 months into 2022 you should ask for current P&Ls with year-over-year comparisons. If the seller has grown the company, and not had a one-time windfall from government policies related to the pandemic, then likely they will get 3.75x. My concern would be that the level of pet ownership skyrocketed during the pandemic, and many of those are sadly being abandoned/returned. https://nypost.com/2021/05/11/pets-adopted-during-the-pandemic-are-being-returned-at-record-numbers/

Reply by a searcher
from The University of Michigan in New York, NY, USA

Agree with Clement on valuation of 3.75x 2021 sounding ok, unless you're confident 2022+ will decline from the 2021 level. I might take the strategy of acknowledging to the seller that 3.75x 2021 could be reasonable if he or she can help you get more comfortable with the 2021 EBITDA #, but that the difference between 500k and 1mm EBITDA is a 4x and 8x valuation, so they need to make the case. Perhaps you can land them closer to 3x 2021 and share with them that it's 6x former years which is a way to meet in the middle, something along those lines.

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