$10M Negotiation Strategy- high EBIDTA & assets

searcher profile

May 26, 2024

by a searcher from Virginia Polytechnic Institute and State University (Virginia Tech) in Winchester, VA 22601, USA

Hey Searchfunder.

I am working on mapping out a negotiation on a high recent earnings and high asset value company. The owner’’s team (non-M&A lawyer and accountant) is asking 10M based on a 5M assets, 5M goodwill valuation. I understand this is a “double dipping” valuation but it’s my starting point.

Weighted average EBIDTA for 22,23,24YTD is $1.5M. ‘23 was $2M and 24 is on track for the same so I can see the argument for ignoring the 22 number.

The asset liquidation value is 3.5-4M.

Based on this info I am looking for feedback on these approaches:

1. offering 8M without real estate.
5M SBA, 1-2M seller financing, 1-2M secondary bank loan, remainder being private investment.

2. offering 10M with real estate.
same as above except longer term on the SBA.

questions:
- if Real estate is $2M does that take my
entire SBA term to 25 years?
- will SBA be ok with a 2 year EBIDTA valuation with explanation?
- what terms are you seeing on private investment? $250k-1M notes

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
To answer your initial questions, including real estate is your SBA 7A loan does not automatically quality you for a 25-year loan term. If the real estate is 51% or more of the total transaction cost, then you can get a 25-year SBA 7A loan on the entire loan amount. If it is less than 50% of the acquisition cost, then you get a blended amortization where 10 years gets assigned to the business purchase debt and 25-years to the real estate debt, and you get a blended amortization somewhere between 10 and 17.5-years. This usually provides a cash flow savings of 5% to 20% (depending on the size of the real estate piece) versus financing them both separately because you get to push out the business acquisition dollars.

Most SBA lenders are looking for the last two years to hit a 1.25x DSCR o better. However, there can be some flexibility there for growing companies by looking at trailing 12-months going backwards.

We would be happy to take a look and help you analyze the company and offer some structure and financing suggestions. You can reach me here or directly at redacted Good luck.
commentor profile
Reply by a professional
from University of Notre Dame in New York, NY, USA
Brad's comments were on the money re: the answers to your questions. As he noted, to lenders a debt service coverage ratio of 1.25 is the magic number. Have you thought about playing around with the deal structure to move some of the upfront purchase price to a back-end arrangement? Earn-outs aren't allowed under SBA but there are other creative alternatives. It would immediately boost the DSCR and make for a more attractive lending option.

On the private investment piece, I've been seeing JV structures all over the map, but happy to discuss a couple examples I've seen on recent deals. DM me or shoot me a note redacted
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