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  • August 2019 (Revised October 2019)
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Systems Design West

By: Richard Ruback and Royce Yudkoff
  • Format:Print
  • | Language:English
  • | Pages:9
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Abstract

Jenn Braus (HBS 2013) was halfway through the 90-day exclusivity period for her proposed acquisition of Systems Design West (SDW). She had completed her business and accounting due diligence. Just as she was about to ask her lawyer to begin drafting the purchase agreement, she received a call from the seller that the company had reached agreement with a large new client that would increase revenue by roughly 20%. The seller asked that the success be reflected in an increased offer price, although he had not specified the amount of the increase.

Braus needed to decide on an appropriate response. Should she stand fast? In her mind, she had already agreed to pay a premium price for SDW, with a higher than typical multiple of EBITDA. Part of her rationale for the high multiple was that she believed the company had significant growth potential. Paying a higher price in response to the new customer seemed like paying twice for the growth. However, because the new customer was so large, Braus imagined that it would nudge the run rate EBITDA for SDW to about $1 million, eliminating a concern she had about the small size of the business. If she decided to negotiate a higher price, how much of an increase was appropriate? Simply applying historical margins would imply that a 20% increase in revenue would correspond to a 20% increase in price. Alternatively, it could be more as margins improved with operating leverage, or it could be less if significant fixed costs were required to on-board the new customer. Additionally, Braus was concerned that a new customer was inherently riskier than SDW’s typical customer that had a history of recurring revenue.

Keywords

Acquisition; Price; Negotiation Offer; Decision Making

Citation

Ruback, Richard, and Royce Yudkoff. "Systems Design West." Harvard Business School Case 220-004, August 2019. (Revised October 2019.)
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About The Authors

Richard S. Ruback

Finance
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Royce G. Yudkoff

Finance
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Related Work

    • August 2019 (Revised October 2019)
    • Faculty Research

    Systems Design West

    By: Richard Ruback and Royce Yudkoff
    • September 2021
    • Faculty Research

    Systems Design West (A) and (B) Case Supplements

    By: Richard S. Ruback and Royce Yudkoff
Related Work
  • Systems Design West By: Richard Ruback and Royce Yudkoff
  • Systems Design West (A) and (B) Case Supplements By: Richard S. Ruback and Royce Yudkoff
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