Financing options for companies with declining earnings

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by a searcher from Thomas More College
in Cincinnati, OH, USA

2yrs ago

Financing options for companies with declining earnings

I'm looking at a company with a strong history, but burnt out owner. With the stable revenue, I believe there is opportunity for increased profitability/earnings. Due to the recent declining earnings, trying to decide if this opportunity is worth using bank financing or if I should approach the buyer with seller financing for a variety of reasons. Any thoughts or suggestions regarding financing and/or valuation?
'20 "21 "22 "23
Revenue: $9.1M $8.9M $10.6M $9.9M
COGS: $6.2M $6.2M $7.7M $7.2M
NET INC: $390K $315K $200K $120K
EBITDA: $565K $465K $350K $260K

'20 '21 '22 '23
AR: $1.25M $950K $810K $810K
INV: $275K $500K $600K $360K
EQUIP: $1.2M $1.25M $1.3M $1.3M
AP: $110K $195K $195K $110K
ACCR'D: $505K $485K $580K $500K

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reply by a searcher 1yr ago
from INSEAD in France

Piggy backing on what Brad said - Financing is definitely still an option but the ~14% increase in COGS fromredactedvs. a revenue increase of ~8% is definitely a question mark

Inflation could have driven up COGS which would mean price increases have not followed (easy fix though careful with customer sensitivity)

COGS here also only account for about ~200k of decrease in EBITDA
Which leaves another ~105k in increase in expenses that affected EBITDA any more information on what that is about?

Hypothesis given minimal info is that owner "over-hired" (100k should be between 1-4 additional employees) fromredactedgiven the ~1.7m increase in revenue during that time, and when business cooled down in 23, employees were still getting paid obviously (another easy fix if you feel like they could be let go).

Conclusion:

Seems like it's still a solid business, affected by inflation like any other business and over-hired because business was doing well.

Goodluck!

reply by a searcher 1yr ago
from Columbia University in New York, NY, USA

I'm reminded of the old adage, "don't try to catch falling knives." If you still decide its an interesting business, then I think the discount rate here would be high, so if you we're to look at normalized income/free cash flow (along with low top line growth), the valuation is probably pretty low. If you can get the seller to sell at a low enough price, you could structure a deal and maybe get it through a bank's credit committee.