2.5 Times Sde For A Modest Sized Business But Seller Isn't Sold

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01/31/2021 Redacted Redacted

searcher HEC School of Management, Paris Loughborough University

2.5 TIMES SDE FOR A MODEST SIZED BUSINESS BUT SELLER ISN'T SOLD

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

1 like 348 views 22 comments

searcher Harvard University - Harvard Business School United States Coast Guard Academy - 01/31/2021

Have you tried offering 4x but with a sellers note and an earn out that makes the return on par with your earlier offer. A “braggable” threshold sometimes gets sellers over the line, e.g. “I sold my business for $3m!”

I’d try it before walking away. It will either get the deal moving again or a sign that you should walk away.

Or have your buddy offer 2x (j/k)

like reply | 3 likes

investor The University of Chicago - Booth School of Business - 02/02/2021

Don't have your buddy do anything. Treat the seller exactly the way you would expect to be treated. If you can make it work - do it. Otherwise move on. Fair play only is the best approach.

like reply | 2 likes

intermediary Naval Postgraduate School United States Naval Academy - 01/31/2021

Negotiation is substantially an education. It appears that the seller may not understand valuation. You might try to challenge him to provide some substantiation for his opinion of value. You might also suggest that he get an opinion of value from a certified valuation. This appears to be a conflict between what he wants vs. what its worth. Unless there is a very obvious upside, 2.5 x SDE may be rich if revenues have been flat.

like reply | 0 likes

searcher Carleton College University of Chicago - 01/31/2021

How badly do you want to own the business? I can imagine that he is afraid of getting cheated because he's selling in a down year. Another option would be to tell him you'd like to keep in touch but also you're concerned that revenues have dipped and you'd like to see if the trend will hold. You can offer to swing back around to him after some period of time, maybe next quarter or so. That would give you both more time to think about it. It would give him more time to prove or improve the

like reply | 0 likes

intermediary Harvard University - Harvard Business School University of Missouri-Kansas City - Henry W. Bloch School of Management Westminster College Fulton - 01/31/2021

Don’t assume that the seller just needs to be educated. You might be the one who needs more information. How do you know he is actually ready to sell? Does he have debt he has to cover that makes your offer a nonstarter? Does he have a lifestyle that can’t be supported from the proceeds of a 2.5X sale? Many times a business just can’t be sold because a seller’s needs (real or perceived) are not consistent with where the market is. Trying to “challenge” a sell

like reply | 4 likes

investor Rensselaer Polytechnic Institute University of Massachusetts at Amherst - 01/31/2021

These take time. If you just started talking valuation, then there might be time to get closer. It's not uncommon to have sellers come back after a few months if they've not heard or received other offers.

like reply | 1 like

searcher University of Virginia - 01/31/2021

Sounds like an unmotivated seller to me. I personally think you are wasting your time. Motivated sellers usually will tell you what they are expecting or what would make them happy. Maybe the timing is not right?

like reply | 3 likes

intermediary Boise State University - 01/31/2021

This is a typical seller situation (especially when the seller isn't represented by an intermediary) and hasn't had the benefit of the coaching he might have received. The seller often has rose-colored glasses when it comes to price. To move forward, I suggest that you find a way to understand his concerns, fears, desires. Are you familiar with John Warrilow's 3 types of business owners? I'll bet he is a "Freedom Fighter" (this is most of the small business owner market). These are the ones

like reply | 7 likes

searcher Carleton College University of Chicago - 01/31/2021

There is a lot of useful advice here. Thank you!

like reply | 1 like

intermediary Illinois Institute of Technology University of Chicago University of Southern California University of Houston - 02/01/2021

So you knew you were putting in a low offer and should have expected a rejection. I would have to have more info on this business (as to size, SDE, products, mfg/distributor, markets, location, etc.), but 2.5x SDE appears to be very low. Compare table 27, p.41 of the 2020 Pepperdine Capital Markets report and the multiple, for the average entry (EV/EBITDA) is 3.9x.

The reaction of the seller was probably...."I can keep the business for 2+ more years, get my SDE, and still own 100%". If

like reply | 2 likes

intermediary Naval Postgraduate School Concordia College, Moorhead - 02/01/2021

You may want to suggest that the owner engage a company to put together a business appraisal

like reply | 0 likes

searcher Dartmouth College - Tuck School of Business at Dartmouth Columbia University University of Mumbai - 02/01/2021

Ollie - another suggestion, to triangulate: put a realistic model together projecting the numbers with the actions you'd take to grow the business and make it more profitable. And see what the model supports.

like reply | 1 like

searcher University of Pittsburgh - The Joseph M. Katz Graduate School of Business Pennsylvania State University - 02/01/2021

We're looking at an earnout model for a small business in a similar situation where we started with a large gap in valuation. It's not finalized, but has allowed negotiation to continue.

like reply | 0 likes

searcher Indian Institute of Technology, Bombay University of Mumbai London Business School - 02/01/2021

Hi Oliver, why don't you use the BVR resource to show them what the industry average is

like reply | 3 likes

professional Portland State University - School of Business Administration Seattle Pacific University - 02/01/2021

Great suggestion Dhaval - showing some actual business transactions and multiples could be very useful here.

like reply | 1 like

searcher University of Pennsylvania - The Wharton School - 02/01/2021

its a tough market.....not sure 2.5x gets anything done these days. some owners just dont care about multiples no matter what research you show them. They have a number in their head and will not budge - broker, banker, advisors be damned. As someone said above, at 2.5x, he can keep the biz for 2 years and make this money (assuming a bounce back from COVID) - difficult to convince someone to sell in that equation.

like reply | 1 like

searcher Indian Institute of Technology, Bombay University of Mumbai London Business School - 02/01/2021

Jason what you said is absolutely correct....this is where you have to fall back on identifying the seller motivation early on....if there is no motivation and price not correct, you have to move on instead of wasting the time

like reply | 0 likes

searcher University of Virginia-Darden - Darden School of Business Denison University - 02/01/2021

Once you move on, do you plan to revisit in 6 months or so to validate if the opinion has changed?

like reply | 0 likes

intermediary The University of Chicago - Booth School of Business Illinois Institute of Technology Cleveland State University - 02/02/2021

Majority of the SDE multiples are based on retail businesses. The standard deviation is very high. Also, the larger the SDE, larger the average/median. Is the business a retail shop, a distributor or a manufacturer or a mix. Is it B2C or a B2B or both? Some SDE multiples include inventory, some do not. None includes A/R.
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

like reply | 3 likes

professional Simon Fraser University University of British Columbia Vancouver Community College University College of the Fraser Valley University of Toronto - 02/08/2021

One of my mentors taught me an expression; "you name the price, and I will name the terms, or you name the terms, and I will name the price" .... our buyside advisory practice may be able to help? https://shaughnessy.group/search

like reply | 0 likes

searcher HEC School of Management, Paris Loughborough University - 02/15/2021

Since the post I've been back and forth with the seller to try to tease out her ideal price and also give her some insight into my position.

It's selling into a low/no growth market (equine products) but with a nice niche focused on horse nutrition. Did you know there is a global horse obesity epidemic? So there should be an increasing need. My sister studied equine science so we pitched ourselves to the owner as 2 for the price of one. She was sold on us as buyers but we can't get anywh

like reply | 0 likes

searcher Carnegie Mellon University - Tepper School of Business Indian Institute of Technology, Kharagpur - 05/13/2021

This is when we appreciate the business brokers and investment bankers. They are the ones take the time to do seller education with their authoritative knowledge about the market and back that with vast amount of market data. In most of the proprietary deals the owners of a good business think ‘if I keep the business for another - years’ or ‘I read in an article you can sell your business for 3x revenue, so... ‘. I had my share once with a technology company (which needed

like reply | 1 like

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