Asking price is way out of range - bother writing an LOI?

July 02, 2021

by an investor from Indiana University at Bloomington in Austin, TX, USA

Currently evaluating a niche B2B subscription business with $1M EBITDA with a 50% CAGR over the last 3 years. Industry is slow growing. Asking price is 15-20x EBITDA. While I like the business - the asking price seems way out of whack. Have looked at this top down and bottom up, closest I can come is maybe 6-10x. I realize benchmarking isn't the best approach here.

Question is - should I even both writing an LOI on this or just pass? Don't want to insult the owner and or waste time for the owners or myself.

How do you handle this sort of situation?

Reply by an investor
from Harvard University in Denver, CO, USA

If the deal is brokered, it's definitely worth calling the broker and sharing your rationale for your valuation relative to the asking price. They'll tell you whether that's a complete non-starter based on the seller's expectations and other participants in the process.

If you're working directly with the seller, I think it can aboslutely be worthwhile to gingerly educate them on why you're valuing the business the way you are. If your reasons are fair (especially if their SDE isn't what was advertised underpinning the asking price, or if their expecation on multiple is demonstrably off-market) and the seller is motivated, you can often make it work.

Reply by a searcher
from United States Naval Academy in Sherman Oaks, Los Angeles, CA, USA

Saas biz's are ridiculously overpriced these days, especially with PE's gobbling them up with cash. So ^redacted‌ and ^redacted‌ may be correct about market rates. Agree that an IOI is worthwhile if you think you could afford it and it would still be profitable after debt service at the higher price. You may want to also ask them to see the talking rainbow unicorn that obviously is part of the valuation :-)

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