[SeeGeeWhy]

We should probably just grab coffee and have a conversation about this because I could go on forever. Here are a few things to consider.

Number one is always motivation. Why are they selling? Ask them what they plan on doing after the deal closes. If they can’t give you a clear and detailed answer they are tire kicking and you are wasting your time. Do not deal with unmotivated sellers, ever.

Point 2 is you must be constantly building rapport & trust and determining what actually matters to them. Deals always come down to and hinge on the strangest things. Negotiation is 1000000% about gaining as much information as impartially as possible. It is your job to find the elements of the deal that are highly valued by them, that wouldn’t be such a big deal for you to provide. That’s where great deals get made. If you can structure a deal in a way that gives both sides what they want and balances risk appropriately, you will be able to close and finance it. I must reiterate here - MONEY ALWAY FINDS WELL STRUCTURED DEALS. Deal comes before money, period.

Next is the price/term balance. You can win on price, or you can win on terms, but not both. For example in your case it sort of sounds like you might have approached them as a strategic acquisition. If so be prepared to pay a premium, but you might be able to win some exceptional terms to help balance some of the risks others have pointed out so far in this thread. You’re always going to be dealing with imperfect information (as will the sellers) but you have to make decisions. Yooh’s example is a good one - including a significant holdback for a period of a year or so to cover the representations and warranties made by the seller as part of the purchase agreement would have protected then greatly.

That’s my high level generic advice. Hope it’s useful.

Where are you at in the process? Have you done this before? Are they working through an intermediary?

Don’t overthink valuation.
If the EBITDA is under 5 million you should expect the valuation to be somewhere between 3-5x the average free cash flow (or, roughly, normalized ebitda) for the past 3-5 years. If the sellers are outside of that range they better be able to justify it. You don’t pay for potential. If they want upside from growth they need to help make it real - performance based payouts on top of guaranteed amounts are excellent for this.