Structure an earnout for this deal

by a searcher

1 year ago

Despite increases in revenue earnings were impacted by the margins being squeezed, Adjusted EBITDA for 2022 was a loss, TTM is basically $0/breakeven, and too early to predict if 2023 earnings will be positive.  Company expects the low margin work to be completed Q3 and higher margin work to return in Q4.  

Debt doesn't seem appropriate with earnings in flux.  Looking for suggestions on structuring an earnout.

2019: $3.75M Revenue / (-$175K) Adjusted EBITDA
2020: $5M Revenue / $325K Adjusted EBITDA
2021: $5M Revenue / $395 Adjusted EBITDA
2022: $5M Revenue / (-150K) Adjusted EBITDA
TTM: $5.8M Revenue / $0 Adjusted EBITDA
Projections: $6M Revenue / TBD Adjusted EBITDA

Balance Sheet (Major Items):
Assets
AR: $900K
Inventory: $1.2M

Liabilities
Customer Deposits: $1.1M 

How would you structure an earnout.....or is there no choice but to wait for TTM earnings to return, so debt is an option??  Looking for any suggestions.

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4 comments

investor from New York University - Leonard N. Stern School of Business

This seems like a tough one to finance with 3rd party debt any time soon. Even if you look at###-###-#### , margins were ~7%. If those were “normal” margins, it seems like it will take a while for TTM to return to meaningful levels. And even then - you might have a decent EBITDA for TTM at some point in 2024, perhaps breakeven for 2023 and a loss for###-###-#### There are many people on searchfundder that have more expertise on this topic, but that looks like a tough credit story to me. If the seller wants to get a deal done any time soon, I would put the financing on them. Depending upon your level of confidence that this situation will turn around, you could put in some amount of equity upfront, then put the rest as an earnout, contingent seller note, or some combination. I’d be careful about how much equity goes in as you would really be taking a risk when things have not turned yet. Depending upon the seller’s situation, perhaps something like this could work, though they might just decide to just hold on selling until things turn around so they can get more cash upfront. No silver bullet offered, but hope this helps!

1 year ago | like reply | 0 likes

searcher from University of San Francisco - School of Management

I'd also want to understand how that A/R has aged historically that can hugely impact the FCF of the business.

1 year ago | like reply | 0 likes

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