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)

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.

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 worth of his business, and it would give you time to look around for better opportunities.

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 seller into believing you are right will lead you no where. May be time to move on.

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.

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?

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 whose identify is what they do. And they tend to own a business for a long time and their employees become family. Also, they tend to trust the opinion of their CPA. Selling the business, for these types, means loss of identity, and that their life as they knew it, is over. What could you do to alleviate those fears? Once you gain his trust and he believes that you "hear and understand him", only then can you start to use rational arguments regarding valuation, etc. Until then, you are fighting a windmill. If you really like this business, it will take some hand-holding on your part to get past his defenses. Also, find out who the CPA or his other advisors are. They may be willing to help get him across the finish line especially if the business revenue is going down. Sometimes owners are their own worst enemies but they are fearful of doing the wrong thing.

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 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

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

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.

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.

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

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

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.

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

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 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.

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

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 anywhere near on valuation.

I've raised my offer to 3.5 times SDE. However, I learned yesterday her target price is effectively 13x SDE.
I'm going to leave her for now and follow up in a few weeks.

In other news, 3 other owners I have spoken to recently have provided astonishing valuations.