Negotiate a deal
Crafting a deal involves navigating valuation, terms around risk, control, and post-close compensation. Mastering the dynamics leads to better outcomes.
In most cases, the buyer makes the first move. They will provide a rough valuation range and terms for consideration. And, unless explicitly stated otherwise, the buyer expects you to counter—don’t just say “yes” to their first offer.
Key components of a deal
- Valuation: Headline purchase price determined by business performance multiples of revenue, discretionary earnings (SDE), or profit (EBITDA). Imaginative repositioning and turnaround strategies may also influence offers.
- Capital Structure: Combination of cash, debt, and equity contributions that fund the acquisition, which dictates risk appetite and return requirements. Too much debt can tank a deal.
- Terms and Provisions: Length and triggers of earnouts, employment agreements, contingencies, and liability caps contained in the definitive purchase agreement. Very seller-favorable terms often entail accepting significant risk of nonpayment.
- Retained Equity: Sellers remaining invested post-transaction allows for benefiting from future growth and stewarding legacy. However, reduced control means weighing preferences against the lead buyer.
Valuation and terms
Higher purchase prices often correspond to more buyer-friendly structures around contingencies and payouts over time. Retaining equity and involvement may drive higher total returns unless urgently seeking liquidity.
Understanding multiples
Most transactions in the SMB space are negotiated in terms of "multiples" of EBITDA. There is no set multiple for a specific business. Still, you can get an approximation based on the transactions of other companies of similar size, industry, and business elements (i.e. leadership, financial consistency).
Here's a table of common multiple ranges of EBITDA by company size.
Source: Pepperdine Private Capital Markets Report
Multiples are obviously an oversimplification of more complicated valuation logic. Sophisticated buyers model scenarios and projections for the future while calculating discount rates based on risk. But until it’s time for both parties to sign a letter of intent to purchase (LOI), conversations focus on multiples.
Calculating your valuation
It helps to break valuation into two parts:
- What is the appropriate multiple for my business? Start from a multiples table and make adjustments. Things like high growth and long-time customers might justify adjusting your multiple upwards, and things like customer concentration and low growth might adjust your multiple downwards.
- What is the accurate EBITDA or SDE of my business? Calculating these metrics before involving accountants involves some judgment—what is the actual total income of the owner (you)? What are one-time expenses vs ongoing ones?
Example:
A company earned $2 million EBITDA last year, after $1 million the prior 2 years.
One buyer offers 4 x $2 million = $8 million.
Another buyer averages 3 years at $1.33 million. So they offer 4 x $1.33 million = $5.3 million.
Checking buyer qualifications
Before committing months of effort to negotiating and closing deals, ensure your shortlist of prospective buyers has the following:
- Vision and growth plan for your company aligned with your goals
- Documented capital capacity to fund the entire contemplated transaction
- Track record successfully completing past acquisitions
Obtain external validation early rather than after months wasted with parties who cannot close.
You’ll see all kinds of creative deal offers out there
Valuations and terms will run the gamut, which is actually a good thing. The key is to stay grounded in what matters most to you. Evaluate those incoming proposals against your personal priorities and interests. And keep the lines of communication open about any must-haves or sticking points.
There are no universal rules or standards that say a buyer must peg their offer to meet specific formulas or match what another buyer puts down. You don't have to go along with any terms you're uncomfortable with or timelines feeling rushed. The numbers get fuzzy. Every multiplier and every structure element has wiggle room up for discussion.
In the end, it comes down to aligned expectations and reasonable compromises to make both sides feel good about where things land. If no offer rises to that level, you always retain the card to walk away rather than forcing a deal. This is especially true if you’ve used a platform like Rejigg to connect directly with buyers. Otherwise, it’s quite common for brokers and other online platforms to pressure you to sell—even if you don’t want to.
