How to Approach Price, etc. with an Offer
March 19, 2021
by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA
Hello all -- I'm looking at a deal currently and am likely to make an offer (I'm planning to go straight to an LOI). However, I find myself torn over a couple things, so I'd appreciate any thoughts on the following questions. For context, I'm a self-funded searcher looking for a relatively small ($400k-$1mm SDE) business. I'm not necessarily thinking of this particular opportunity as a company I'd sell in 5-7 years; I could see myself sticking with it longer term or hiring a manager and building something of a portfolio in the region. The business is a specialty contractor in the residential construction industry. I've had fairly extensive conversations with the broker and a couple in-depth discussions with the seller, including a lengthy site visit. And this is my first go-around so apologies if these questions lack sophistication.
1) The deal I'm looking at is brokered. Is there usually much room on price with brokered deals, or are they generally fairly firm?
2) I think the deal works at the ask price (a couple banks I've been talking to agree at first glance) but obviously some cushion is always preferable, particularly considering industry volatility and that I'd be looking at a 10% equity structure if possible. At the same time, I don't want to be greedy and alter my relationship with the seller, as he seems exceptionally committed to a smooth transition. There is a heavy relationship component with the firm and I'd need the seller to make introductions to clients and help ensure those relationships survive the transition. The seller's also willing to provide financing (seemingly up to around 20%). Considering all this, is pushing for the best possible price the right approach, or should I instead focus on ensuring the seller financing is meaningful to keep interests aligned and that the transition is smooth? I know this is ultimately something of a judgement call, but I'm just wondering how I should be thinking about the dynamics at play.
Thanks in advance for any thoughts.
from Duke University in Tulsa, OK, USA
In general for any offer I submit I would make sure that the business's current cash flow is sufficient to pay your fair market salary for a job you could get with an employer, a reasonable profit for your investment and risk, and then what is left can be used for debt service. If the remaining cash flow doesn't support the debt service on the seller's asking price then I would adjust the asking price accordingly. This week I made an offer on a business for less than asking price for the reasons above. I politely explained my reasoning to the broker and they completely understood my point of view. In a hypothetical deal you can also calculate your debt service coverage ratio (DSCR) and make sure it is at least 1.5 or similar number you are comfortable with.
from Texas A&M University in Johnson City, TN, USA
I'm in a similar point in my search to you, looking at same SDE range. For me personally, my plan is to lead with 3x "adjusted" EBITDA or so. But averaging this over past 3x years (not just most recent year). Maybe up to 4x, if I remove certain things I don't agree with on their adjustments.
Don't be worried to walk away if your offer doesn't stick at your multiplier. Use the broker to help with negotiation, they are motivated to just close the deal. You can always offer more money, but cutting down later if you discover offer was off, not as easy.
^redacted good point on the DSCR.