Thoughts on paying above market multiple on acquisition?

by a searcher from Miami University of Ohio

5 months ago

Some color to my situation... It is in an industry I have experience. I'm geographically constrained and this is in my radius. Clean financials with strong reputation and past performance. It is a competitive situation. Seller chose me over 3 other parties even though I wasn't the highest offer. DSCR is 1.5 at current sale price. SBA has approved. 

What are the long term implications of "overpaying" for a business that I should be aware of that my blinders are keeping me from seeing?

1 like
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28 comments

professional from University of Southern California - Marshall School of Business

For some businesses, more important than price is the company's sustainable profit and competitive advantages. Especially if the other terms of purchase don't restrict the company's cash flow or anything else. Think about how much back-and-forth you want between you and the seller regarding counteroffers. Think about what is the most reasonable almost-maximum price an informed buyer would pay for the business. That's the number known by informed sellers. Some sellers will wait for the right buyer unless they are highly motivated to sell or they have other reasons to sell their business on terms less than what they reasonably think they can get if they continue to market their company for sale. At the least, get (another) signed LOI and get into due diligence. Due diligence may convince you that price isn't the most important factor, and if it is you'll adjust if you decide to submit your definitive purchase agreement. Stay focused on the Debt Service Coverage Ratio (DSCR).

5 months ago | like reply | 0 likes

searcher from University of Virginia-Darden - Darden School of Business

Great discussion- thanks for posting

5 months ago | like reply | 1 like

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