Valuation Multiple for Aerospace Distribution company

December 30, 2022

by a searcher from Rice University - Jesse H. Jones Graduate School of Business in Houston, TX, USA

Hi Everyone,

Asking for a fellow searcher who is looking at a small aerospace distributor and is prepping an IOI.

Asking price: $1.6M
Revenue: $5.1M
Adj EBITDA: 357K (7.0%)
Inventory: $325K

Seller owns property and would lease it to buyer at market rate.

Revenue Concentration:
60% Large Aerospace SBA8(a) set aside (for disadvantaged owners, which the searcher qualifies for)
28% Various
12% Large Aviation Defense Contractor

I also ran these through a model and the DSCR came out to 1.25 based on:
$1.443M, or 80% SBA7(a) @ Prime (7.5%) + 2.25%; 10 year amort
150K Cash to Balance Sheet
$54K (or 3%) in txn fees & expenses

Capital Stack also includes:
10% Seller Financing @ 10%
10% Preferred Rate

Questions:
1. Is the valuation multiple of 4.5x reasonable, considering the above?
2. Should we expect the revenue concentration to be an issue for an SBA lender?
3. Do you have recommendations on how to structure/negotiate this type of deal?

Thank you all, in advance!

Best,
Adam

Reply by a searcher
from University of Illinois at Urbana in Rockford, IL, USA

To help me evaluate a multiple, there are various components I would consider, among these are: financial health history, how long the company has been operating, how transferrable it is, how much value I can add (is it a good fit?). I also try to get a sense of the multiple for similar transactions for which I use PeerComps (Database with SBA transactions). I typically locate the NAICS code for the business I am interested, or do a keyword search to find comparable businesses. I only found one business transaction titled "Aviation Parts Distributor", Annual Sales was $4.3M, with SDE of $882K, and sold in 2020 for 3.82 x SDE. This was under NAICS code###-###-#### The other comparable businesses under the same NAICS had a SDE multiple range between 3.08 and 3.9. I can not remember if these multiples include inventory or not...but I think there was information on this on other posts. This is just a data point, so take it with a grain of salt...but I have found PeerComps useful to search for comparable businesses that were purchased using SBA loans...For main street deals, such as this one, I have typically done my analysis using SDE. I also considered the last 3 year SDEs, and do a weighted average calculation to determine the SDE I will use to support my purchase price proposals.... I would recommend running the deal through a bank (e.g. Live Oak or Huntington), to see how much of an issue the customer concentration might be. If I understood the post, two customers drive 72% of the revenue...if this is correct, then I think it is increases the risk considerably and it will be tricky to qualify for an SBA loan...In any case, I've found running the deal through a bank helps me get key questions I need answers for, and in the past, it allowed me to come to the negotiation table with at least a couple banks willing to finance the deal under the LOI I propose. Since we are talking defense and aerospace, I would ask whether contracts (if any) are transferrable...if they are not, then I would assume a stock sale will be needed instead of an asset sale. A stock sale will drive a lower multiple because it will increase the liability risk to the buyer and I believe it also has tax advantages for the Seller. Just my 2 cents. I have worked in the Aerospace/Defense industry for over 16 years...so I am a little familiar with it...I have not purchase a deal yet, but just sharing a bit of the framework I have used for the LOIs and negotiations I've had in the past in case it helps. Good luck!

Reply by a searcher
from Rice University in Houston, TX, USA

Thanks for your responses, ^redacted‌ ^redacted‌ ^redacted‌^redacted‌^redacted‌^redacted‌‌‌‌ Extremely helpful.

The searcher decided not to pursue this business due to lack of revenue stability and generally low cash flows. Based on our calcs, the business would not be able to service the debt without a significantly larger portion of seller financing and/or investor equity in the capital stack. Beyond this, and my key takeaway: inconsistent 4-year history of profitability (SDE fluctuates +/- more than 30%) can cause serious concerns about the health of the business.

Key takeaways from your guidance:
1. Some SBA lenders (and their underwriters) are willing accept higher revenue concentration, but it depends on multiple factors. IE how long the business has been around, the health of the business, and the quality of the customer relationship (and any contracts that are in place), Run it by a few banks for feedback.

2. If property is (or can be part of the deal), try to get it to increase the length of amortization period on the senior debt.

3. Target a DSCR of >1.5

4. Current lender rates are prime plus###-###-#### %. (critical to estimating DSCR)

5. PeerComps is a good resource for valuation comps; but to be taken "with a grain of salt." It's a proxy; there are a lot more to a valuation than comps (company history, transferability, ability for buyer to add value). Comp analysis can be done using SDE (Seller's discretionary earnings) for smaller businesses.

Thank you all again!

+7 more replies.

Join the discussion