Purchase Price Adjustments

August 12, 2020

by a searcher from Babson College - F.W. Olin Graduate School in Boston, MA, USA

Looking for input and advice from those who have successfully closed, despite a purchase price adjustment down from the LOI.

Hypothetical scenario:
FYE '19 EBITDA = $1M
LOI Purchase Price = $4m (4x)
Diligence reviewed TTM EBITDA = $700k
Adjusted PP = $2.8 (using the 4x)

Not an actual deal, but how many private deals go to diligence and actually show larger earnings? For those who successfully have negotiated through close, despite an adjustment down (for whatever reason) I'd like to connect for a brief call, please. Thanks.

3 Likes

5 Replies

195 Views

Replies

Reply by a searcher
from New York University in New York, NY, USA

I've had deals go both ways. In situations where EBITDA was higher than expected, I've stayed silent on that fact unless there was an agreement in the LOI that we were paying a multiple and would adjust it up or down based on the quality of earnings, but typically I have the LOI's state that EBITDA needs to be at least $XYZ. In situations where EBITDA was lower, it really comes down to explaining to the seller where you got your valuation and that it was based on the assumption of a certain EBITDA level. And because EBITDA is not there, you need to readjust. There are a number of different ways to message that, but it comes down to educating the seller, which isn't easy most of the time. Depending on what caused the lower than expected earnings, you can decide to pay a higher multiple to the extent you're comfortable with that, or adjust the structure to help bridge the gap. I've had a situation where the owner was staying involved and was amendment about a certain number. In that case, I agreed to an earn-out structure that let them reach their number if they brought EBITDA to a certain threshold by a specific date. I'm happy to chat on the phone if that's helpful.

Reply by a professional
from Villanova University in New York, NY, USA

-Michael, nicely said
-Matthew, On a fixed price deal, a positive adjustment really doesn't matter ("EBITDA at least $XYZ") in terms of PP. On deals based on an EBITDA multiple, you'll need to discuss the adjustments with your Seller. As a CPA/due diligence professional, I am often asked by my buy-side clients to help explain the adjustments to their Sellers. You could try that route as an option. Seller should understand when it's Math and Accounting, but worst case scenario, it becomes a negotiating point. Happy to hop on the phone with you.
-Dave

+3 more replies.

Join the discussion