Closed searchers advice - valuation

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by a searcher from Duke University - The Fuqua School of Business in Washington, DC, USA

10h ago

Closed searchers advice - valuation

If you have closed on an acquisition, I'm curious to know if your valuation at LOI, and other sources of valuation were off, and what you did to bridge the delta and how you made the seller feel comfortable with where you landed. I'm in the middle of a SBA financed deal where after diligence, all data points (investors, the bank, AI, etc.) point to a valuation 38% lower than the LOI. Because of lender constraints as well, the loan amount must go down (a higher seller note puts the DSCR past the limit) and I can't put in any more equity. I feel confident no other buyer can put in as much equity as me nor has the chops to do a better job post close. But his BATNA is that they keep just running the business for 3.5 yrs and he would get the same amount. Thoughts?

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Reply by a lender 7h ago
from Cornell University in Los Angeles, CA, USA

Hi Anon - I'm an SBA loan broker. I deal with this exact situation regularly. Here's what actually works. You have three options to bridge the gap: 1. Lower the purchase price. If the bank, investors, and every other data point say the business is worth 38% less, that is what it's worth. The seller's BATNA of "I'll just run it for 3.5 more years" assumes nothing goes wrong. No burnout, no key employees leaving, no market changes. That's a big assumption. 2. Put the seller note on full standby. This is the move most people miss. Under current SBA rules (SOPredacted), a seller note on full standby (no payments at all until the SBA loan is paid off) does not count against your DSCR. So if a bigger seller note is killing your coverage ratio, put it on full standby and it disappears from the DSCR calculation entirely. Problem solved. 3. Mix both. Seller comes down on price, carries a bigger note on full standby. Nobody gets everything they want. Deal gets done. One warning from experience: I worked a deal with a similar valuation gap. The seller kept sending "updated" financials. First version had one set of numbers. Second version had COGS drop by $400K+ with no real explanation. Revenue shifted between versions. Salary lines moved around. Each time we asked why, we got more documents but also more inconsistencies. Eventually, the tax return came in and the numbers were materially different from the P&L the seller had been presenting. At that point the lender walked. The takeaway: push for filed tax returns early. A signed tax return is the one document nobody argues with. If the seller's P&L keeps changing or doesn't match the return, that will catch up with you eventually. The lesson: if the seller's books are messy, every correction creates a new question. Push hard for filed tax returns. A signed tax return is the one document nobody argues with. We have a lot experience financing various companies via the SBA. If you ever need help reviewing a deal, I am happy to help. We work with all the major SBA lenders. The bank pay us after your loan closes, so this is a 100% free service for you. You can email me directly at redacted or schedule a meeting with me: redacted. Look forward to chatting!

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