Valuing a cash business

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by a searcher from Rutgers-The State University of New Jersey-Newark/New Brunswick - Rutgers Business School
in Jersey City, NJ, USA

1yr ago

Valuing a cash business

Hi everyone,

I'm looking at a predominantly cash business (thus does not qualify for SBA) that offers a crucial service to its customers with significant recurring revenue. There are no formal contracts with the customers and it's currently priced at 4x SDE. The owner handles all sales and customer acquisition . Was wondering if anyone has any ideas on how to properly structure this deal to insure a proper margin of safety.

Thank you.

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reply by a professional 1yr ago
from Bentley College in Miami, FL, USA

Here are a few approaches you might consider:

Seller Financing: Structuring part of the deal with seller financing can help create a safety net. This way, the seller has a vested interest in ensuring the business's continued success post-transition.

Retention Bonuses or Earn-Outs: You might negotiate earn-outs tied to revenue milestones or retention bonuses for the seller to stay on and support sales/customer acquisition for a period. This can be particularly useful when the owner has been the main point of contact for customers.

Customer Verification: If you haven’t already, conduct a detailed analysis of customer trends and satisfaction. Even without contracts, patterns in repeat business and customer loyalty can offer reassurance.

In-Depth Due Diligence: Given the cash nature of the business, you may want to work with experts who can validate the revenue streams and help analyze the historical financials. A specialized due diligence team can help assess the true financial health of the business and any associated risks.

If you need support in finding due diligence professionals experienced with cash-heavy or recurring revenue models, platforms like DueDilio can connect you with vetted experts.

Note: This response was generated using a combination of custom AI and my own internal data, research and experience in the industry to ensure it’s both comprehensive and accurate.

reply by a professional 1yr ago
from Pontificia Universidad Católica Madre y Maestra (PUCMM) in Santo Domingo, Dominican Republic

Not much more to add, seeing as most of the business is personal relationship, seller financing with a large percentage allocates to business retention and success metrics would be the way to go.