Business appraisal

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by a searcher from Georgia Institute of Technology
in San Francisco, California, USA

1mo ago

Business appraisal

The bank’s third-party appraisal just came back at ~$1.3M, while the negotiated purchase price is closer to ~$2.6M (inclusive of seller note/earnout structure). Business is profitable with recurring revenue, but growth has been relatively flat the past few years. My thesis is based more on strategic upside (AI modernization, installed customer base, distribution, cross-sell opportunities, etc.) rather than purely historical financial performance. For those who’ve gone through acquisitions before: 1) How much weight would you place on a bank appraisal coming in materially below purchase price? 2) Is a ~50% delta a major red flag, or relatively common in lower middle market deals where operator upside exists? 3) What specific things would you dig into further before moving forward? Would appreciate candid thoughts from operators/lenders who’ve seen this before.

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reply by a searcher 1mo ago
from The University of Michigan in Kirkland, WA, USA

Hi — this seems unusual to me as well, especially with the appraisal coming in at roughly 50% of the purchase price. I would expect some gap when the thesis is based on future upside rather than trailing performance, but that is still a significant delta.

reply by a lender 1mo ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

From my perspective that is a pretty big shortfall in value. It is possible you got a bad business valuation, but usually unlikely as the Bank's review those. However, with a value that short I would have expected your banker to warn you up front that it might not value out. As for valuation, a $2.6 million company cannot have super high EBITDA to begin with. Although the market might be 8-12x, that is likely for businesses with much higher EBITDA levels. It is not likely for businesses with lower starting EBITDA levels like this. If the seller is unwilling to move on price, how do you plan to make up the shortfall, or is there enough equity and seller debt that you are not borrowing that much? If you would like another set of eyes to review the deal from a lender perspective and just let you know if it makes sense, we would be happy to do so. You can reach me here or directly at redacted If at the end of the day the numbers just do not make sense, you do not want to substantially overpay for a business because you are going to be behind from day one. I always say that sometimes the best deal you do is the one you do not do.