Frothy Market Driving Higher Multiples - Deals Failing

I've heard from many fellow searchers and from lenders that the market is quite frothy. Multiples have crept up driven in large part by a much larger buying base at the $500k-$2.0m EBITDA level. I've also heard that the failure rate of deals post LOI is at an all time high.

While we all want that dream deal where we put in a meager 10% equity, borrow 90% from the SBA, and sail off to great wealth creation, it's just not a common reality. Here's the bottom line, if you assume a 1.50x DSCR, you cannot ever acquire a business for more than 4.0x EBITDA without putting in more than 10% equity, the math just doesn't work. Here is a simple spreadsheet that outlines the math. Above 4.0x, your max loan amount caps out and you have to start putting in more equity.

So why are deals failing post LOI? Brokers are chasing top dollar for companies (that is their job) and searchers and other buyers are trying to cut through the noise by putting in high dollar LOIs. Neither strategy works as those deals cannot get funded and ultimately fail.

So, my advice, fellow searchers, is to either a) stop offering to acquire companies at valuations that you cannot get sufficient funding for or b) be willing to invest the required equity to get the deals done at higher valuations.

Now let's go acquire some awesome companies and continue to prove out this amazing ETA construct.