Family Life Business Deal Size

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by a searcher from University of Virginia-Darden - Darden School of Business
in Charlottesville, VA, USA

3yrs ago

Family Life Business Deal Size

I'm looking at purchasing my family's business, which I've been managing for a while. I'm looking at possible deal structures and valuations and want to ensure that I am going down the right road.

The company is 35 years old and has always been profitable. It has consistently grown but not at a consistent rate. The average EBDITA over the last five years is $750K, with an after-tax cash flow of about $300K, including my salary (manager's) and the current owner's salary.

I expect it to continue to grow based on new products we have recently put out.

The offer I put forward is:

The total valuation is $4.5M, about a 6X EBITDA multiple.

Bank Financing: $4M Equity: $250K Seller Note: $250K

I'm also including a 10 years employment/consulting contract to the owner of $200K/year, having the owner still involved in the valuable company as he is the primary engineer.

This brings the total deal size to about $6.5M

When I run the numbers based on a 10% interest rate, the yearly debt service comes to just ~$800K.

From what I am seeing, this math doesn't work.

Am I off on my valuation? Is there a better deal structure that I am missing

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reply by a searcher 3yrs ago
from Texas A&M University in Johnson City, TN, USA

In addition to likely too high multiple, it sounds like your EBITDA number maybe include add backs on salaries? Be very careful here not to confuse SDE with EBITDA.

If you think that you need the long employment contract, it sounds like you think the engineer position is necessary, so may be not a valid add back for you. 10yr too long, also won't work SBA if that's your intent.

If you take 3 to 4x your $300k...that would only be $900k to $1.2M EV. Try running your numbers with that to check DSCR.

reply by a searcher 3yrs ago
from University of Connecticut in Westchester County, NY, USA

Agreed with most of the comments above. 6x mult on 750K is high. If this is a family business, depending on your relationship with the owner there may be a number of ways to creatively finance this deal. Higher amount of seller financing, buyout over time, etc. That consulting agreement should be 1 to 2 years at most. Much better for you in the long run as you'll be able to more fully implement your strategy on the business.