How should multiples be adjusted for relationship based businesses?

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June 21, 2022

by a searcher from Binghamton University, State University of New York - School of Management in New York, NY, USA

When purchasing a business that derives much of its success from the personal relationships that the owner has built, how should that factor into the multiple? I am looking to convince a seller to lower their price given that most of what I would be buying is their relationships.

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Reply by a searcher
from Harvard University in Houston, TX, USA
I talked with a searcher recently who bought a business that ended up being a heavy relationship-based business (couldn't tell until after buying). Not only did business fall substantially when the owner left but the owner also had misstated and misrepresented other aspects of the income and cash flow forecasts. Even without the misstatements it was a disaster for the searcher - the other small-PE equity providers took over the business and the CEO/searcher had to leave to save his career.
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Reply by a searcher
in Dacula, GA 30019, USA
Enormously. I’d hesitate massively to make a purchase like that unless the owner agreed to stay on eith some sort of skin in the game for at least a few years while I built upon those relationships.

anything else is like buying AND incentivizing your star employee to leave.
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