Underwriting companies with spiking earnings

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by a searcher from University of Illinois at Urbana-Champaign
in Dallas, TX, USA

2yrs ago

Underwriting companies with spiking earnings

Looking at expanding through acquisition and have connected with a company who has prepared for selling by improving their margins in the lastredactedmonths. As a result, their TTM shows a 50% growth in earnings relative to their last tax return.

So my question is whether there are SBA programs that would allow a QoE or audit to verify the TTM earnings and we could underwrite a deal accordingly? Otherwise, are there conventional programs that could underwrite against the TTM?

Am hoping that this provides a path for others in similar positions.

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reply by a searcher 2yrs ago
from Ryerson University in Toronto, ON, Canada

I am evaluating a deal in a similar circumstance - it has grown 50% in 2024 YTD, and after much back and forth, they countered with: 4.3X based on TTM with 2.8X in cash, and the remaining balance 50/50 seller note and earnout. The seller note is interest-only for first two years and can be "paused" if profits fall back to theredactedlevels; the earnout is tied to gross profit, and if it falls back toredactedGP levels, then the earnout amount that year would be reduced by the amount of the "fall". Wondering if this is a good deal, in light of what you said regarding the forgiveability of the note portion to de-risk the situation? Thanks in advance!

reply by a searcher 2yrs ago
from University of Illinois at Urbana in Dallas, TX, USA

This makes a lot of sense. Down payment to your/the bank’s valuation, but the Seller achieves their valuation (or more) if the earnings they represent hold true.