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
from University of Illinois at Urbana in Rockford, IL, USA
from Rice University in Houston, TX, USA
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!