I am negotiating an LOI at the moment, asset sale, $500k SDE for $430k. The $500k SDE is previous FY, $300k in previous year, breakeven 3 years ago, and stable $200k in prior years. 6 month order book predicts $700k SDE in next 12m.
It is a project-based engineering business with egregious add-backs, hence the discounted multiple. The owner is extremely financially unsavvy, to the extent that he doesn't have a handle at all on net profit vs gross.
I learned today that the seller assumes he will collect the cash on AR. The broker is not helping - he has the view that working capital is never included in asset sales. Even if the concept was understood, the practical nature of establishing the peg would be a nightmare given the month-to-month lumpiness of WC.
I have stretched negotiations thus far, and the current structure / price has room to account for working capital cash on close.
Questions:
1) What do I risk by excluding NWC from the deal and making an estimate on historicals, then accounting for that cash on close?
2) I assume I would need to somehow account for / look out for accelerated invoicing for projects in progress just prior to close. Any ideas on how to handle that?
3) I should push to accommodate inventory in the sale (which is predominantly WIP) because to tease out the partial progress from upcoming progress invoices would just be a mess. Or just wear it and take the risk? Thoughts?
4) A/P would have to be excluded, and customer deposits included in the sale (reduction in EV). Right?
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by a searcher
from London Business School
in South Africa
in South Africa
1yr ago
Why not exclude NWC and account for extra $$ to save the pain of confusion?
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by a searcher
1yr ago
from London Business School in South Africa
from London Business School in South Africa
Thanks Tony, that's basically where my head is at as well. The inventory is predominantly WIP so it would tie in to the project by project consideration. My expectation is that the projects should transfer by default unless there's some anomaly which determines otherwise.
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by a searcher
1yr ago
from Queens College in New York, NY, USA
from Queens College in New York, NY, USA
Are the seller's sales agreements transferable? Since this is an asset sale and a new entity is slated to take over the existing work, you should make sure that all of those agreements can be transferred over to your entity. Current clients could refuse to pay future invoices, or try to renegotiate.
Additionally, any sales agreements for future work which are not transferable would need to be resigned. Those clients could decide against it and then your future pipeline dries up.
You should have the seller prepare a Work in Progress schedule and include a corresponding invoice schedule. Each open project should have a timeline, cost estimate, and profit estimate. You will be responsible for all of the remaining costs and you should be entitled to the profit per job or some % based on where each project stands. The invoice schedule should show the agreed upon invoicing cadence per contract, what invoices have been issued and what has/has not been paid. Open invoices should then match the open AR balances.
Additionally, any sales agreements for future work which are not transferable would need to be resigned. Those clients could decide against it and then your future pipeline dries up.
You should have the seller prepare a Work in Progress schedule and include a corresponding invoice schedule. Each open project should have a timeline, cost estimate, and profit estimate. You will be responsible for all of the remaining costs and you should be entitled to the profit per job or some % based on where each project stands. The invoice schedule should show the agreed upon invoicing cadence per contract, what invoices have been issued and what has/has not been paid. Open invoices should then match the open AR balances.
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