This is a gifts and home business. Discretionary purchase. I'm valuing it at 3.3x EBITDA and expecting that 2024 will be 10% down on 2023, with growth returning in 2025 in response to increased sales effort and product launches.
Questions:
1. Is 3.3x fair/rich/lowball?
2. I'm asking for normalized NWC to be included at that multiple. Seller claims that the business has carried too much inventory but I have verified that it needs to carry what it has done historically because of various supply chain constraints
3. How would you calculate NWC? I'm asking for Average(AR - AP + Inventory)
2019 2020 2021 2022 TTM Sept
Revenue 7.7 5.5 6.6 6.2 5.9
GP 4.4 3.5 3.9 3.7 3.7
GP% 57.53% 63.46% 58.96% 58.97% 62.62%
Expenses 3.7 2.7 2.5 2.4 2.5
Expenses % 48.24% 50.44% 38.69% 38.56% 43.48%
EBITDA 0.7 0.7 1.3 1.3 1.1
EBITDA % 9.63% 13.43% 20.20% 20.64% 19.08%
AR Dec 0.4 0.39 0.35 0.31 0.4 AP Dec -0.2 -0.2 -###-###-#### -0.16 Inventory Dec###-###-#### 2.0 1.7 2.5 2.5
Did you get an inventory listing data? How are you gonna account for fast moving low margin, high margin slow moving? Any perishable or deteriorating type product ?
the sellers will always make the argument NWC is higher than required, but if it was they would normalize it and pull the cash out before your deal closed. In reality, liquidating a bunch of inventory is a huge time suck, and not always doable at cost. Your don’t want that risk or headache post close. Trust your valuation, make your offer, and walk if the seller can’t get there.
the last thing you want after closing is a large working capital investment sucking up your liquidity. That can literally kill your business before you even settle in.