Does anyone find anything wrong with companies that have very high margins? - Searchfunder

Member resources:

Member directory

Searchfund list

Company contacts

Industry reports

Transaction multiples

Frequent asked questions:

What is Searchfunder.com?

Searchfunder.com is an online community of searchers, investors, lenders, brokers and other professionals. Over 80% of those involved in searchfunds maintain a Searchfunder account to help them network, hire, and mentor others.

What are the benefits of membership?

In addition to accessing the most active online network of business buyers, Searchfunder licenses research that is simply not cost effective for individuals. Access over 15,000 industry reports and 50,000 transaction financials. You also get monthly credits for contact information for your company sourcing campaign with the option to purchase more at drastically discounted rates. Searchfunder has pre-purchased access from these data providers in order to empower individual buyers and to help searchers level the playing field versus private equity.

Do you have deals?

While we are primarily a buy-side network, we do have hundreds of brokers that regularly post deals to the community.

Can I find an internship on Searchfunder?

Absolutely! We have the industry's largest intern job board. If you are considering a search, the first step is to help another business buyer so you can hit the ground running.

What does it cost?

Searchfunder is a subscription service. We offer flexible monthly, annual and lifetime memberships.

Monthly

$79 / month

Annual

$19 / month

Lifetime

$432 / once

Those who maintain an account with us for over 4 continuous years are permanently added to the community without the need for a membership.

Do I need an MBA to join?

While a large number of our members come from dedicated programs at Harvard Business School, Stanford GSB, Chicago Booth, and other top programs, searching is no longer reserved for the elite. With the current abundance of dry powder in private equity, and an increasing number of business owners reaching retirement age, good deals rarely go unfunded.

Post a question, deal, job, etc...

Make a post...

Complete registration to post.

by a searcher from Boston College
in Pittsburgh, PA, USA

3yrs ago

Does anyone find anything wrong with companies that have very high margins?

Obviously, intuitively the higher the EBITDA margin the better, but has anyone had experiences where a higher margin meant something not as desirable behind the scenes? In the sense that the margin is "too good to be true", perhaps there is customer concentration, lack of regulation, they misrepresent the numbers, other things I am missing?

Share

3 Likes

208 Views

Login to read all 13 comments

reply by a searcher 2yrs ago
from Columbia University in New York, NY, USA

If it's not immediately obvious what's causing it, you'll want to look for cornered resources, and whether or not you will have access to them.

Classic example here is a seller that owns the building and doesn't charge rent to themselves. This will make for a brick and mortar business (especially in a popular area) that has way out of league margins.

reply by a searcher 1yr ago
from Pomona College in Asheville, NC, USA

This is a great question I would like to bump. I'm looking at a very small deal (~$300k SDE) in a small rural town. The industry is usually >70% gross margin, and perhaps 25-30% EBITDA. This is a quick and dirty home service, half-discretionary, and non-recurring/project-based (but not cyclical historically). My target operates at >60% EBITDA, as they have no back office beyond the seller. I'm expecting to spend more to grow/professionalize and bring EBITDA down to 40% as we grow. But the price is cheap so the deal still pencils out at 25% EBITDA. Deal is primarily funded by non-recourse seller debt as there are lots of idiosyncratic personal-related warts. There aren't really barriers to entry here (the equipment start-up costs would be low, labor is easy to learn), and we don't really have a brand moat or anything like that. But there is only one other local competitor and their prices are much higher than ours while their service is probably worse. So my target's "competitive advantage" or "reason for consistently extraordinary margins" is basically just that nobody else in the smallish town realizes how profitable this little niche is. Obviously, not going to appeal to Warren Buffett or the HBR guide. So despite probably unsustainable historical margins, I like the investment at a low price (~2x SDE). Curious if anybody else has done something like this (bought tiny SMB with unsustainable high margins for a cheap multiple), for a positive or negative outcome.

More on Searchfunder