What business size range (EBITDA) presents the greatest opportunity?
April 27, 2021
by a searcher from University of Virginia-Darden - Darden School of Business in Chicago, IL, USA
I’m sure the right answer here is “it depends” on industry, searcher background, investor profiles, etc. But in general, where do you think the average searcher should look in terms of earnings range? Is it $200k-750k? $750k-$1.5M? $1.5M-5M? Something else entirely?
What did you consider in formulating your answer? I think relevant factors include valuation/multiples, buyer competition, fragility, growth potential, likely number of employees, size of opportunity set, and expected time to close on a transaction. Any others?
from Vanderbilt University in St. Petersburg, FL, USA
$300-750k – You can pay 1-3x SDE for a good business with minimal/moderate deal risk for self-funded searchers. Not very competitive from an M&A perspective – you can usually find a good deal in less than 6 months. Need to be interested in getting your hands dirty in the operations and a longer-term hold. Also think these businesses tend to have ample room for automation and operational improvements that may allow you to get to the $700k plus earnings range quickly (while retaining significant equity with minimal/moderate risk). PG isn’t too bad when you are paying 2x SDE.
$750k-$1.5mm – This range I find to be the most challenging for self-funded searchers as you likely still have to do a PG but the multiples start to creep up pretty quickly. This can make it risky for a self funded searcher for a number of reasons. There are going to be more buyers out there with more capital behind them competing in this space. You may have some level of middle management at this size but your day to day probably won’t look too much different from the $300k-700k space. It’s still worth searching for a good deal here, but I’d be conservative on the multiple you are willing to pay.
$1.5mm - $3mm – Traditional search world. You need to have some capital behind you to compete with smaller PE / Independent sponsors. Multiples 6xish and it can take a while to find a deal (close to two years on average). Still a great model, and plenty of room for investors and searcher / operator to have a nice pay day. Searcher likely won’t have to do a PG either. From a searcher perspective, if you can find a bigger deal, your equity will be worth more (all other things constant – which is not reality). These businesses usually have some level of middle management to allow searcher to focus more time on higher level strategy and growth initiatives (although still plenty of time will be spent putting out fires / getting your hands dirty).
All about what your short and long term interests/goals are.
from Southern Methodist University in Sarasota, FL, USA
Due diligence is also much quicker and much cheaper.
I chose the smaller route as more a lifestyle decision than a monetary one (i.e. more time with my kids, no phone calls at night or weekends - that is for my GM to worry about).