What do you do when the seller's expectations are wildly unrealistic?

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May 23, 2022

by a searcher from Northwestern University - Kellogg School of Management in Chicago, IL, USA

This seems to happen more with deals on brokerage sites (like Microacquire), but I've seen several service businesses there expecting 10x EBITDA multiples for agency businesses. I've sent messages asking why they expect such a high valuation, but honestly, the responses make me think they're just clueless.

My assumption is that it's not worth trying to educate and change people with mismatched expectations, but I'm curious if anyone else has a strategy for dealing with this?

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Reply by a searcher
from Babson College in Raleigh, NC, USA
I like to use the UPSYD sales framework when considering potential deals. It's not a perfect corollary, but provides a good starting point. Ultimately, this is a sales job, and your prospects are business owners.

U- Unaware of the Problem-- In this case, they don't know about the problems that selling would solve (succession, liquidity, etc). Lowest competition, lowest probability of close.
P- Problem Aware-- They know about the problems, but are still unaware of solutions- i.e- selling. Lower competition, lower probability of close
S- Solution Aware-- They know about selling, but may be uneducated regarding price, process, timeline, etc. High competition, high probability of close
Y- YOUR solution aware-- They recognize you as a potential solution, but may also be considering other buyers. Some knowledge on pricing/process. Higher competition, higher probability of close
D- Deal-- They want to sell to you, but are looking for the best deal, terms, etc. Highest knowledge on pricing/process. Highest competition, highest probability of close.

On the "U" end of the spectrum, you have to make several "sales", namely convincing them that they actually have a problem, the utility of selling vs other options, and so on. By the time they're at "D", it's about terms/price.

Sounds like the "10x" deal may be in the "S" column, which is why most advise you to walk away and find something else. They may need the market to "school" them before they realize what's realistic, and you may 0r may not want to be the pioneer with arrows on your back. Figure out what kind of sellers you want to deal with and that will determine your course of action.
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Reply by a searcher
from Harvard University in Fort Wayne, IN, USA
Love a lot of commentary above. Moving on is probably the right call 99% of the time, but I think if the business is perfect in all other ways, it might make sense to take an hour or two to test the waters.

They can have whatever price they want if you can dictate the terms. “Sure I’ll give you 10x EBITDA, but I’m going to pay it off by giving you 20% of my EBITDA over five years if we hit this growth profile.” They can tell their golf buddies they sold for X, but you only pay it over a long time and if they grow like crazy. 100% seller financed deals with predetermined % of growth payouts can be amazing deals. Just barely missed out on a logistics co this way. Didn’t love the company or the deal, but he was willing to look at an extremely generous structure that had zero downside for me for a sizable deal. Sadly he got a more “normal” offer in the 11th hour.

But again, it’s worth an hour or two at the most (writing up the IOI) and only if it’s a perfect company.
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