Dear Community,

I am seeking insights and advice on analyzing a potential acquisition of a mechanical parts distributor. Below are the key details of the target company, including financials and operational aspects. Any guidance or thoughts on this matter would be immensely valuable.

Target Company Overview:

  • Industry: Mechanical Parts Distributor
  • Financials:
    • Revenue: Ranges from $3.5M to $5.3M
    • EBITDA: Estimated between $500K to $2M
    • Inventory Value: $4M to $5M (At Cost) / $8M to $10M (Retail), included in the purchase price
    • Asking Price: $4.5M

Key Points:

  • The company has confirmed credit card (CC) revenue of $3.5M for 2023, identified through preliminary due diligence amid poor financial record-keeping.
  • The seller mentions an additional $1M in check deposits, with bank statements showing $5.3M in deposits for 2023, pending verification.
  • Inventory consists of at least 110,000 items, valued between $4M to $5M at cost, representing roughly a year's stock.
  • The seller is seeking retirement, indicating potential for negotiation. However, the business's systems, including inventory management, are outdated.
  • A significant portion of the business###-###-#### %) operates in cash, not reported in tax returns. CC transactions are verifiable at $3.5M, with expenses estimated between $2.9M to $3.4M.
  • Considering CC and check transactions, the verifiable revenue stands at $4.5M, leading to an estimated $1M EBITDA, excluding $600K in cash expenses for wages.


  1. Is basing the purchase price on verifiable revenue (CC + Check) minus expenses to calculate EBITDA a secure approach for determining the offer?
  2. What methods are recommended for verifying cash transactions (e.g., trial periods, probationary periods, escrow holds)?
  3. Does the substantial, verifiable inventory value offer additional security for the deal? (That is, should I be taking the inventory into account such as follows - if target is making $1M in verifiable EBITDA and has $2M in verifiable inventory, should I feel golden if acquiring for $4.5M even though $4.5M represent a 4.5x valuation based on EBITDA alone).
  4. In this case, could the negotiation terms (e.g., seller financing, revenue-based contingencies, interest only periods) be more critical than the purchase price itself? (overall, extra financing will represent a minor increased expense in the big picture but putting more down may pose a higher risk burden to buyer if acquisition fails).
  5. What deal structures would be advisable for this acquisition?
  6. Are there other critical factors or risks that should be considered in this analysis? What have you done in similar situations?

Thank you in advance for your valuable insights and recommendations on proceeding with this acquisition.