Input on deal structure -- specific deal

October 03, 2023

by a searcher in Cincinnati, OH, USA

I'm looking at a company, where the retirement age owner has taken their eye off the ball in the past 1-2 years, which impacted profitability. I believe it can be turned around based on my experience and the stable revenue. Seller indicated their preference for a "revenue share" deal structure. My concern is that the higher priority is increasing profit, so an earnout based on profitability seems more appropriate. Another factor is the WC, particularly the Inventory. What deal structure would you offer?

2021 2022 2023 Projection Sales 5,015 4,790 5070 COGS 3,428 3,190 3,568 68.3% 66.6% 70.3% Gross Profit 1,587 1,600 1,502 31.6% 33.4% 29.6% Adj EBITDA 420 298 80 8.37% 6.22% 1.58%

Balance Sheet
Assets###-###-#### ,400 (Inventory is 625, FFE is 450, AR is 425) Liabilities###-###-####

Reply by a searcher
in Boston, MA, USA

You've probably run into this already, but there's a constant push and pull between seller and buyer on "where" the earnout is measured. Topline feels most concrete and least open to SG&A gamification (addressing seller concerns), but at the end of the day it is ultimately all about profits (what buyer cares most about)... Could you meet in the middle at GP rather than EBITDA? That seems to have declined less sharply than Adj. EBITDA.

How much this matters ultimately depends heavily on deal structure - is the earnout the main source of acquisition financing, or is it batting cleanup on ~10% of TEV?

Reply by a searcher
in New York, NY, USA

Is revenue share the only element of acquisition? or is that combined with some other equity financing? If the current owner is letting you take over his company for $0, and is asking for a certain % revenue share, then that's a different story with its own dynamics - what % of revenue share, how long, is there a cap either based on total revenue figures or revenue+ timeline?

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