The 13 Deal Scoring Criteria We Use

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by an investor from The University of Chicago - Booth School of Business
in Chicago, IL, USA

1h ago

The 13 Deal Scoring Criteria We Use

We see hundreds of business acquisition deals a year; scoring each on these 13 criteria helps us focus on the most promising: 1. Revenue Quality - recurring or re-occurring is best, project-based and lumpy is worst. 2. Customer Concentration / stroke of pen risk - less is better. Too high is almost impossible to structure around and almost always deal breaker. 3. EBITDA & Margins - what scale is the business operating at, and is it a low margin, normal (for the industry) margin or high margin operation? 4. Entry Multiple - we’re looking for below 5x 5. Capital Intensity - needing to sink a lot of money into equipment and inventory as a percentage of revenue is a negative. 6. Working Capital intensity - how long does it take the business to collect cash and how much inventory do they need to hold (if any) compared to how much time they have to pay their bills? 7. Industry / Regulatory Risk - Businesses that rise and fall with new construction cycles, or natural resource prices, or interest rate cycles, etc, are less attractive 8. Transition / Key Person Risk - Can the searcher fill the gaps if one or more key people leave? 9. Seller Motivation - the best is “I’m 80 and it’s time to retire.” The worst is “I’m 25 and have other projects I want to focus on.” 10. Deal Structure - The more skin in the game the seller keeps (seller note, earn out, rolled equity) the better. 11. Investor Terms - Are they in line with market norms, or maybe even attractive for being slightly above those norms? 12. Real Estate - Not necessarily good or bad, but important to understand if present. How expensive is the real estate relative to the operating business? Is there a sale leaseback? 13. Franchise / Union - These change the nature of the business and are crucial to make note of. Anything I missed that you’d add as #14?

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reply by a professional 50m ago
from Oxford Brookes University in Karachi, Pakistan

I'd also add Owner Dependency / Operational Independence to the list. Personally, I believe the stronger the operating ecosystem, the better the business. No one wants to buy themselves a job, they want to acquire a business that can continue running without the owner being involved in every decision and be more focused strategically. Things like well documented SOPs, a capable management team, and systems that allow the business to operate independently make a company far more attractive. I'd also look at employee turnover over time, as it often provides insight into employee satisfaction, management quality, and the overall health of the organization. A stable, engaged workforce can be a significant competitive advantage after an acquisition.