I am currently negotiating a deal with a seller for a sales and distribution business. The 2021 EBITDA is projected to be ~$1.5M, up from $1M in[redacted]Due to widescale supply chain disruptions, the seller has quite a bit of backorder buildup which he wants to include in addition to the EBITDA valuation. His logic is that if it hadn't been for the supply chain disruption, then his EBITDA would be even higher and he should get paid for that.

He estimates his sales backlog at end of year will be about $10M (typically it's around $3M). So he surmises that $7M of that backlog is excess and would have translated to EBITDA. He typically has a net income % of 6-8%, so he thinks that taking 5% of the backlog value is conservative and reasonable. 5% of $7M at a 5x multiple = $1.75M. He is proposing that we add an additional $1.75M onto the purchase price.

Has anyone ever dealt with valuing backorder?

This seems to be an abnormal event caused by the current global supply chain challenges. My initial reaction is to not value the excess backorder the same as EBITDA as it's not even AR and the orders could potentially be cancelled. But the seller is pushing for a backorder adjustment to the valuation, since by his logic, EBITDA would be well over $2M if the supply chain were normalized.