Insights on sharing the price and terms of the LOI with the seller

May 24, 2023

by a searcher from INSEAD in Chicago, IL, USA

Update: Thanks for the insights everyone - I meant doing an in person meeting to walk the seller through my LOI and terms in the presence of the Broker instead of sending via email - I didnt intend to circumvent the broker but rather was just asking about whether I should do it in person or via email :)

Hi Searfunder community,

My offer price is about 20% less than what the seller is asking because of the below reasons:
1. Inventory worth 50% of revenue is included in the asking price and many of it is old inventory not being used regulary. With the high cost of capital I dont feel very comfortable paying for so much inventory and would prefer to negotiate better terms on the inventory.

2. The asking price is 6.5 times the last years EBIDTA - Which i feel is quite high for manufacturing.

I would lik to walk the terms of the LOI with the seller and understand his perspective rather than send an email via the broker. Any insights on how best to approach this.

Reply by an intermediary
from New York University in Menlo Park, CA, USA

If you want to be sure everything is communicated to the seller, put your offer in a PDF with your important points about the inventory clearly listed. The broker isn’t going to retype your document and it will include your explanation and logic.

Buying a business is a complicated transaction and you are sure to have disagreement between the parties. How the seller reacts and counters, declines or ignores your offer is an important data point in your beginning relationship. Be sure you can establish a productive relationship where you are able to work through disagreements in effective ways. You are going to need each other for months or maybe years into the future. If you can’t figure out how to work together in the beginning, chances are you’ll struggle over the course of any transition with increasing levels of conflict.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

Talk to the broker about the inventory and what role it played in determining the price (usually very little as that is usually based on EBITDA/cash flow), and if they have had any discussions about the inventory and whether or not any of it is obsolete. Then, depending on the answers, you may have a case, or not. And the next moves by both parties will depend on where you fall in terms of the other buyers (if any) along the multitude of criteria a seller considers.

BTW - based on the phraseology "many of it is old inventory not being used regularly", are we talking about inventory (consumable items and items available for sale) or equipment?

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