COVID Clarity on Valuations

by a searcher from University of New England

2 years ago

Question:

Currently in negotiating on the purchase of a manufacturing business based on a multiple of the last 3 years EBITDA and weighted to last 12 months as earnings over the last two years have improved significantly based on managing cost base...COVID in Sydney is now looking like threatening future earnings with hard lockdowns looking like they will be in place till Oct/Nov...

How would some of you more experienced buyers play this out with both the seller and the situation?

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searcher from University of New England

Thanks for your feedback Ron and Elliot...in this specific situation the margin improvements were operationally based and not related to COVID. I like the seller note with forgiveness linked to key performance levels...

2 years ago | like reply | 0 likes

professional from Harvard University - Harvard Business School

^Searchfunder member‌ I agree with Ron Buck. If they've improved margins during COVID you have two worries: 1) that trend will not continue if Covid's impact ends and 2) Covid is worse than expected and there could be downward pressure. This situation lends itself to an earn out or seller note based on###-###-#### month performance. You may even want to discuss a "covid seller note" that is forgivable for 6 months if Covid impacted earnings drop below a certain level.

2 years ago | like reply | 1 like

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