Seller concerns about new assets purchased prior to deal close

searcher profile

February 07, 2023

by a searcher in Utah, USA

Hello Search Community,

I'm negotiating an LOI with a seller and they have been growing at a lot in the last year and expect to continue to do so this year. In order to grow, the company needs to purchase new assets. The seller has repeatedly stated that they "are not comfortable paying for new assets to hand them over at closing". e.g. purchasing new assets during the due diligence process.

Has anyone dealt with this? How do you approach it with the seller and are there any deal terms that could be included to assuage their concern?

I have already proposed an earn-out for new contracts (e.g. the revenue that will come from these assets). They do not feel this will garner them enough return. I also don't want to them to stop investing during the deal process.

Thanks!

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commentor profile
Reply by a professional
from Boston College in Baltimore, MD, USA
Athena, assuming that you validated that its required for future growth and not to maintain existing revenue or replace existing equipment, I've seen large pre-closing equipment expenditures handled a number of different ways and if you land on something bespoke you'll be in good company. Examples have included: (i) Seller will lease rather than buy the equipment with the lease (regardless of terms) being treated as an operating lease rather than capital lease at closing (mindful of change of control provisions in the equipment lease); (ii) Buyer to increase purchase price by some or all of the value of the equipment (essentially pay for some or all of the equipment if the transaction closes); (iii) as you suggest, adjusting the earnout so that earnout repays buyer for anticipated growth resulting from the equipment; (iv) etc. Good luck!
commentor profile
Reply by a professional
from Simon Fraser University in Vancouver, BC, Canada
Hi Athena,
Have not dealt with this directly, but here would be my suggestion. Identify the historic PPE and working capital PEG that is needed to to maintain the earnings on the EBITA/SDE multiple you paid. IE, if you paid on a EBITDA of $1 million, what PPE and working capital is needed to hit that number? that amount should be transferred as part of the deal. Anything purchased from the seller that is beyond what is necessary to maintain that figure, would be bought by you on a dollar to dollar basis. TTM PPE and working capital is a good place to start, let me know if you have any questions or thoughts on this. During diligence a target can be obtained, which is then adjusted at close.
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