EXECUTIVE SUMMARY: A restaurant acquisition faced a valuation that came in about $100,000 below the negotiated selling price, but the buyer, seller, lender, brokers, and attorneys worked together to restructure the deal and keep it alive.Our client was a veteran who had a dream to own a restaurant one day. He was even more excited about it because his son had just recently graduated from culinary school and would be his lead chef.He also located a restaurant that cash-flowed pretty well and served the cuisine his son specialized in and was passionate about.This was shaping up to be a feel-good, made-for-TV movie.
The Business Valuation Came in Short
We went through the process, and when the business valuation came back, it was right around $100,000 shy of where the current selling price was.We had to figure this out.The bank would not loan more than what the business is worth, and the seller still wanted the price that was currently negotiated.That created a problem that had to be solved if the deal was going to move forward.Everyone Had to Come Together
This is where the whole team has to come together to navigate a deal through rough waters. Otherwise, it dies quickly.The seller, buyer, lender, business brokers, and attorneys all have to step up and figure out a way to solve the issue.In this case, we were able to help guide the buyer and seller to settle on lowering the price by $45,000, and then the seller made up the remainder in cash.It was fortunate that he was so passionate about the business that he was willing to do this.Restructuring the Deal
As a financier, we see this scenario once in a while where a valuation will come in a little light and the deal will have to be restructured to compensate for the lower amount.In this deal, both parties gave a little and received a little.The seller didn’t have to lower his price to completely cover the shortfall, and the buyer did get the business a little cheaper but still had to come up with a little more cash.It wasn’t perfect for either side, but it gave both sides a way forward.Key Takeaway
When a business valuation comes in below the negotiated selling price, the deal does not necessarily have to die. Sometimes the buyer and seller have to give a little, restructure the deal, and find a solution that allows the acquisition to move forward.In this case, that meant a $45,000 reduction in the purchase price, with the seller making up the remainder in cash.It was a WIN-WIN, and that’s really all you can ask for.Do You Have a Deal You Would Like to Discuss?
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FAQ
What happens when a business valuation comes in below the purchase price?
When a business valuation comes in below the negotiated purchase price, the financing and deal structure may need to be adjusted. In this restaurant acquisition, the valuation was approximately $100,000 short. The buyer, seller, lender, brokers, and attorneys worked together to restructure the transaction rather than allowing the valuation issue to end the deal.
Can a business acquisition still close if the valuation comes in low?
Yes, a low business valuation does not necessarily mean the acquisition is over. In this case, both parties were willing to make adjustments to keep the transaction moving. The purchase price was reduced by $45,000, and the remaining valuation shortfall was addressed as part of the restructured deal.
Will a lender finance more than the business valuation?
In this transaction, the lender would not provide financing above the value supported by the business valuation. That created a gap between the negotiated selling price and the amount that could be financed. The parties then had to determine how to restructure the acquisition so the buyer could still purchase the business.
How can a business valuation shortfall be handled in an acquisition?
A valuation shortfall may require changes to the purchase price, additional cash, or another adjustment to the transaction structure. In this case, the seller agreed to reduce the purchase price by $45,000, while the remainder of the approximately $100,000 valuation gap was addressed with additional cash so the acquisition could continue.
Does a low business valuation mean the purchase price has to be renegotiated?
It can. When the valuation does not support the negotiated purchase price, the buyer and seller may need to revisit the economics of the transaction. In this case, neither side absorbed the entire shortfall. The seller reduced the purchase price by $45,000, allowing both parties to compromise and keep the acquisition moving toward closing.
Who should be involved when a business valuation creates a financing problem?
A valuation issue can affect several parts of an acquisition, so coordination between the buyer, seller, lender, business brokers, and attorneys may be necessary. In this restaurant acquisition, everyone involved had to work together to find a structure that addressed the valuation gap while still giving the buyer and seller an acceptable path forward.