Pricing Adjustment During DD

December 12, 2024

by a searcher from University of California, Santa Barbara in Santa Monica, CA, USA

3 months ago we submitted an LOI for 4x EBITDA on an electrical engineering firm. Now we are seeing current year will likely be negative EBITDA. Curious to hear what people have done to renegotiate. Do we hold back some money for an earn out when profitability comes back? Other ideas?

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Reply by a searcher
from The University of Chicago in Boston, MA, USA

I would tend to agree with others on the thread that this is not worth pursuing. A couple of items to think about for how you extract yourself. 1) if you have confidence the EBITDA will be around flat you can have a very direct conversation with the seller that there is no return for the ROI. Regardless of the bank, this isn't worth your equity. If they are open to 100% seller financing you can consider moving forward. But the bigger question is where will you get your confidence that profitability will return? do you know the space intimately? Are there immediate cost take outs that won't impact the business? Strategic buyers can sometimes get comfortable with deals like this to acquire on a gross margin multiple and cut lots of G&A. Typically that's not the case with a searcher, so be very fearful. Facing a capital to fund working capital and profitability is a scary proposition.

Reply by a searcher
from Grenoble Ecole de Management in Vancouver, BC, Canada

Echoing others, this is a pretty big red flag and financing does gets tougher when recent financial performance significantly declines. I'd really try to understand and think through the drivers for the significant change in performance.

That said, in a couple of deals I was negotiating, EBITDA fell significantly (although not negative) for reasons that I believed were operating errors / avoidable. Rather than kill these deals, I had a frank discussion with the sellers and told them how performance impacts buyer financing and suggested they either re-calibrate their valuation expectations, or wait another cycle. In my cases, both understood where I was coming from and we are keeping in touch so that we can re-engage in due course.

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