Went to look at a company last week. Decent business with $12MM in revenue in the personnel placement space – health care industry. Problem is that the balance sheet is “upside down” – meaning that liabilities are greater than assets. What happened? The owner was cash rich and invested in Florida real estate and invested and so forth. And we know how that story ended.
So here are the particuliars – about $600,000 in EBITDA, $2.2MM in AR, bank loan of $2.5MM, receivable from the owner of $1.5MM. One could argue the conpany is worth 4X EBITDA or $2.4MM. But revenue has been slightly down, a large piece of the business – almost half resides with one individual and in truth when one looks at EBITDA remember thats before interest. In a company with poor working capital throughput – meaning the AR is slow to collect (ie hospitals) and personnel are paid weekly — then interest is an issue.
So for this company the interest should be deduected from EBITDA – so is cash flow really $400,000 whcih would be ($2MM loan @ 10% = $200,000 in interest such that $600,000 – $200,000 = $400,000). And secondly the owner wants to stay on and I have to question his business acumen having blown $1.5MM on multiple FL properties.
So I think we will pass.