Capittal's view: my last year was weak, should I sell or wait?

Quick answer

Capittal's view is that a weak year does not stop you selling, it stops you selling without explaining it. The buyer is not buying your last set of accounts: they are buying the trajectory they can project forward. Waiting a year only pays off if you spend those months fixing the cause of the weak year. Waiting without fixing anything does not erase the weak year, it adds another one to the record.

What does the buyer actually look at, the last year or the trajectory?

No professional buyer values a company on a single financial year. They look at a series and search for a direction.

• Three to five closed financial years. These set the normal level of sales and margin, not the level of the last one.
• Last twelve months (LTM) EBITDA. This is the figure that actually gets negotiated. It captures the most recent closed months, not the calendar year of the last filed accounts.
• The current year budget and month-by-month delivery against it. A budget met for six months running carries more weight than any verbal explanation.
• The trend in margins, order book and pricing. The buyer wants to know whether the margin is recovering or still falling.
• Customer and contract concentration. This decides whether the weak year was an accident or the signal of an underlying weakness.

That is why a weak year does not close the door. What closes it is a weak year the seller cannot explain with numbers.

Is my weak year explainable or is the business deteriorating?

This is the question that decides whether you sell now or wait. There are two kinds of weak year and only one of them can be defended.

An explainable weak year has an identifiable, dated and non-recurring cause. These are the usual ones:

• The one-off loss of a large customer, with the exact date and the amount.
• A strike, the long-term absence of a key person or damage to the premises.
• Building works or a move to new premises that halted production for weeks.
• A sudden rise in the price of an input that you have already passed on in your prices.
• Litigation or a fine, with the provision booked in the accounts.
• An investment that hits profit today and generates revenue later: a new salesperson, a product line, a new site.

Structural deterioration has no date. The margin falls year after year. Market share moves to a cheaper or faster competitor. The product is losing relevance. The main customer is bringing in house what you used to do for them. Here the problem is not the financial year, it is the business.

With an identifiable cause, you sell by explaining. With structural deterioration, waiting fixes nothing on its own: you either change something in the business or accept that the price reflects what the buyer can see.

How do you defend a weak year in front of a buyer?

You defend it with documents, not with a story. And the work is done before you sit down, not during due diligence.

• Documented normalisation adjustments. Non-recurring costs and income are isolated and evidenced one by one with the invoice, the contract or the court ruling. No buyer accepts an adjustment without support.
• Reported EBITDA, adjusted EBITDA and LTM EBITDA, all three together. Let the buyer see the three figures and where each one comes from, on the same page.
• A current year budget with demonstrable delivery. Monthly accounts, a comparison against budget and an explanation of every variance. Every month delivered is a price argument.
• A written explanation before anyone asks for it. One page in the information memorandum setting out what happened, when, what it cost and what has been done to stop it happening again.
• Evidence of the recovery. Signed orders, renewed contracts, new prices already in force, the lost customer replaced.

A weak year the seller puts on the table on day one is a data point. The same year discovered by the buyer during due diligence is a credibility problem, and that costs more than the weak year itself.

What happens to price and structure if my last year was weak?

Here is the most common misunderstanding. Sellers fear a cut to the multiple. What usually happens is different: the buyer keeps the multiple and changes the payment structure.

• Earn-out. Part of the price is made conditional on the business recovering to the level you say it will recover to.
• Retention or escrow. An amount is held on deposit for a period to cover contingencies and shortfalls.
• Vendor loan. You finance part of the price yourself, receive it later and carry the business risk in the meantime.
• The calculation base. The buyer will try to apply the multiple to the weak year's EBITDA rather than the adjusted figure. That is where most of the money is lost.

The combined effect is that the seller ends up financing their own recovery. If you are right and the weak year was an accident, you will receive almost all of it, just later. If you are wrong, the earn-out never arrives. That is why negotiating the formula, the perimeter being measured and access to monthly information is worth more than arguing over a tenth of a multiple.

When is it worth waiting a year?

Waiting makes sense when those months are spent doing something. Not when they are spent hoping.

• The cause is identified and can be fixed within twelve months. Replacing the lost customer, passing on the cost, finishing the works, settling the litigation.
• You already have evidence that the fix is working. Recent months back at the historic margin, not a plan in a spreadsheet.
• The business can afford to wait. Stable cash, bank debt and management team. Waiting with no cash and the banks on your back is not waiting, it is adding risk.
• There is no personal urgency. No health issue, no shareholder dispute, no family succession that is never going to happen.

There is a practical test that settles the question. If at the end of the year of waiting you will not have a better set of accounts that you can prove, you are not waiting: you are delaying.

What does waiting cost me?

Waiting is never neutral. It has a price that almost nobody calculates before deciding.

• The market cycle. Buyer appetite and the cost of debt move, and they do not move at your pace. A good market window does not wait for your recovery.
• One more year on the record. If the following year is also soft, you are no longer defending an accident, you are defending a trend. That is the scenario that genuinely destroys price.
• Your own fatigue. Another year running a company that is going backwards is tiring, and tiredness shows in a negotiation.
• The process calendar. An orderly sale takes months from preparation to completion. Waiting a year means being paid well beyond a year from now.

The decision is not selling high or selling cheap. It is selling while explaining one weak year, or risking having to explain two.

What if I need to sell now and cannot wait?

You can sell, and you can sell well. On three conditions.

• Early transparency. The weak year goes into the first conversation, with its cause and its number. Sellers who hide it pay twice.
• The right buyer. A trade buyer in your sector understands a weak year because they have lived through one. A growth-driven fund will penalise the last set of accounts harder and compensate with an earn-out.
• Fight the structure, not the headline. Accept that part of the price will be deferred and spend the negotiation on the calculation base, the powers you keep and an acceleration clause if you are removed from management.

And one rule that saves grief: do not go to market without the weak year already explained in writing and without the recent months closed. A process launched with half-finished accounts turns every doubt into a discount.

What is the next step if I am coming off a weak year?

Do two things before you decide. First, write one page setting out the cause of the weak year, its amount and the evidence behind it. Second, close the months of the current year and work out your last twelve months EBITDA. With those two pages in front of you, the question stops being sell or wait and becomes what is it worth today and what would it be worth with the cause fixed. That comparison can be made with real numbers in a few weeks.

At Capittal Transacciones we normalise EBITDA and build the defence of a weak year as part of the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the conversation about whether to go to market now or wait.

Keep reading

• Guide: every decision you face when selling your company
• Owner perks and EBITDA adjustments
• When to sell and when to wait

Time it with numbers, not intuition: talk to Capittal