2.5 times SDE for a modest sized business but seller isn't sold
January 31, 2021
by a searcher from HEC School of Management, Paris in Nottingham, UK
Context:
Entrepreneur started an equine products business 10 years ago and now wants to sell 90%. Revenues are stalled and dipped during 2020.
I have initially offered 2.5x SDE but this was rejected - as I expected it might be - but the seller says I'm nowhere near the right ballpark. However, they can't tell me where the ballpark might be.
Question:
We're still corresponding but I wondered if anyone has had a similar experience dealing with an entrepreneur and getting a deal over the line after starting with such a large gap to begin with. Or should I put this fish back?
Thanks,
Ollie
from Illinois Institute of Technology in Pasadena, CA, USA
The reaction of the seller was probably...."I can keep the business for 2+ more years, get my SDE, and still own 100%". If you have "offended" the seller by lowballing a good business (don't know and not saying you did), you probably have an uphill climb to get back.
I would have tried harder to establish the seller's expectation first before offering anything. As an investment banker, we don't take a client on without first determining if the valuation expectation is market defensible. You should also have considered EBITDAC, the impact of covid to the business if revenue dipped in 2020.
That being said, did you have competitive multiples for this type of business before offering 2.5x? I'd be interested too, on how you "sold"/justified this valuation to the seller. redacted for more dialog.
https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1012&context=gsbm_pcm_pcmr
from The University of Chicago in Chicago, IL, USA
How is SDE impacted by accounting method (cash vs accrual), inventory counting and costing, etc.? How does SDE change as a % of sales? How does inventory/sales ratio change over years?
Is 2020 impact short-term or long-term? Has business seen downturn before?
My two cents: I am an M&A Advisor. If a deal does not close buyer keeps equity (minus some expenses), seller keeps the business, attorneys and CPA get paid. We on the other hand put bread on the table only if the deal closes, So, when I represent a business, I want to make sure the risk of wasting "my" time is low. Hence, I focus on the "quality" of the business first, then on quality of earnings, then management/ownership and then on seller expectations (value, structure, net proceeds, post-transaction involvement, appetite for R&W, etc.).
If you pay 2.5x and the business fails, you have lost your $ equity and time equity. If you pay more (say 3.5x), and the business does not fail, your ROI will be lower, and you will gained the "experience". Almost all of my individual buyers have MBAs. I have yet to see one fail.