Buyer and Math Question

by a searcher from University of Virginia-Darden - Darden School of Business

6 months ago

So I saw a business in a tangential industry to my own company is in. The adjusted “EBITDA” for 2019 through 2023 was $233k, $88k, $496k, $1450k, $1,500k. That’s a mean of $753k and a standard deviation of $603k. The business was hollowed out during the pandemic. And they told me they can’t get me numbers from before###-###-#### I reluctantly made an offer. They were insulted and said that they have standing offers of $5-$6MM. That’s a 7.3x EBITDA multiple if the price is $5.5MM.

So my question is two fold:
1) If you have a 7.3x EBITDA offer on a business that has a standard deviation as a percentage of EBITDA at 80% in a basic project based non high growth industry why on earth would you not sell that tomorrow?
2) Who would pay that for a corporate vents company?

Looking for perspectives on this.

1 like
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16 comments

searcher from Harvard University - Harvard Business School

On the second part, there could be many reasons someone would pay that. Maybe the buyer sees a way to quickly realize significant revenue and/or cost synergies. Or perhaps the seller is exaggerating their existing offers.

5 months ago | like reply | 0 likes

intermediary from Florida State University

First you need to understand the growth catalysts for 2022 and 2023 and whether or not that EBITDA seems reasonably sustainable. If you can get comfortable with the trajectory, you are really paying something closer to 4x. Also keep this in mind, $5,000,000 of MAXIMUM PRICED SBA 7(a) dollars right now over a 10 year term is going to cost you roughly $835,000/year. Assuming that these EBITDA numbers are justifiable you are realizing a DSCR of 1.73x. Additionally, you can actually qualify for 100% financing here however you are capped at $5M exposure so lets say to cover the $500k delta ($5.5M purchase price) you have the seller hold a note for $250k on standby for two years and then you bring about $250k of cash to the table. Thats a CoC return 246% in year 1.

This is basic napkin math and doesnt account for a few variables but this should help you put the purchase in perspective.

6 months ago | like reply | 1 like

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