Seeking Negotiation Tip re: Working Capital

March 08, 2023

by an intermediary from University of Nevada - Las Vegas in Henderson, NV, USA

I have a seller that wants to value a business that does under $400k in EBITDA, but wants the business to be valued at a multiple of revenue which is about $2.7M with about $500k of debt. The industry is trucking/transporation and this would be a stock sale.

My question is how would you structure the deal if the seller is asking for $1.6M without any working capital and I am more at $615K with some working capital?

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Reply by a professional
from Villanova University in West Chester, PA, USA

I agree with ^redacted‌ that earn-outs can be a great strategy to solve for discrepancies in value, so essentially the final value of the deal is determined over time based on the actual performance of the company, as opposed to projections. They can be structured in a way that there are earn out teirs based on future performance. Whether those are acceptable to the parties is dependent on the circumstances, and it can limit your ability to get SBA financing. An asset purchase might be another solution to carve out specific assets or a piece of the business where you're more aligned on valuation. There's a lot of value in a deal other than the purchase price, so it's considering all of those levers and figuring out if there's something you can get to for both parties. For example, if the sellers would stay on as employees, maybe you can get lower salaries or consulting fees in exchange for accepting a higher sale price. The same goes for a deal with seller owned real estate and the lease terms. I'd be happy to discuss this further.

Reply by a searcher
in Miami, FL, USA

So, when you say you're at $615K, does that mean that's the maximum you'll pay at all, or only right now? If you're okay paying more for the business over time, you'll have to structure an earnout deal or some form of delayed payment or seller financing. Those are realistically the only options I see with my very limited knowledge.

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