HOW MUCH IS TOO MUCH "HAIR" ON A DEAL?

Background

We found an operation that looks good from a qualitative perspective. We've been trying to do as much diligence "in-house" before paying accountants to review financials. The deal is under $10m in revenue and around $2m in recast EBITDA. Pending deeper diligence, we verbally agreed, to a purchase price of $9-10m.

The "Hair"

The seller doesn't use an accountant for anything but taxes and isn't using a broker to sell. He has been acting as his own accountant (he has an engineering background.)

Accounting wise, the seller does some of the "standard" stuff such as funneling some of his personal expenses through the operation and artificially manipulating some numbers for tax savings. He has been honest about all of this and has been cleaning the books up to prep for a sale. All small from a dollar perspective.

When he bought the business from the previous owner, he did take a seller finance note that somehow ended up becoming an "investment" on his balance sheet. It now represents, 31% of his total assets and we are not sure why it wasn't written off or amortized as goodwill. He is now saying it should be "capital" but that still doesn't make sense. I don't think the seller is being malicious. I just think he doesn't know and we've been acting like his "broker," by trying to make sense of his financials. We can submit a vague LOI covering us for these terms and start reviewing more documents but some of these issues may cause us to substantially lower the price we said we COULD pay him and waste a lot of time.
Thoughts? Like most first time searchers, I am not experienced enough to know how much "hair" is too much, so I wanted to get the community's thoughts here. At this revenue size, I don't expect business in this industry to be perfect. I am thinking about prioritizing the high dollar issues first (i.e. prior seller finance,) address them via clauses in our LOI, and see if we can make sense of it once the seller starts sending us more information post LOI. At the same time, I don't want to send in accountants too early.

Does anyone have any thoughts here? How much "hair" is too much?



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