How to Identify a Great Deal when Business Buying.
You want as many of these attributes as possible:
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Clean books. Clean books. Clean books. Easy to understand P&L and Tax Returns. No funny business.
Adjusted Earnings (SDE or EBITDA) between 250K-900K is I think the sweet spot for maximizing ROI on both your $$ and time.
Smaller can be better relative % gain but too time consuming. Bigger can be less time consuming but you have to pay higher multiples.
Not too wrapped around the current owner. See this thread for a helpful guide on this: twitter.com/ClintFiore/status/1495423005333196801
In business for at least 3 years. Longer is better.
At least 5 employees. People act like the less employees, the better... but it's just not true. You're trying to buy a business, not a high-paying J-O-B, and you want good people in sufficient quantity.
Strong RPH- revenue per head. This is one of the sexiest metrics people don't talk about enough. When comparing companies side by side in similar industries, I generally want the one with the highest revenue per employee. Employees are hard to get nowadays- get the most from them
Geographically located somewhere with a growing population. Rising tide lifts all boats.
Good reviews / reputation. Really hard to turn around a bad reputation.
Trending upwards. Easier to accelerate when heading the right direction already.
You have something in your background/experience this company will benefit from. Could be connections, knowledge, technology, sales and marketing experience, financial sophistication, etc...
What's between your ears gives this company something it's missing.
Strong margins. I like slightly higher than normal margins in industry when possible. Assuming you can immediately fix low margins to industry standard is an extremely dangerous assumption. I'd rather grow revenue with already good margins.
Rich owner (study their personal assets/wealth as much as you can, as well as the business), strong cash position on biz balance sheet, and low or no debt.
Success leaves clues.
Most revenue is recurring or reoccuring.
Recurring = an automatic monthly, quarterly, or annual payment from customer. (ex. quarterly pest control agreement)
Reoccuring = same customers come back over and over though not automatic. (ex. periodic restaurant vent hood cleaning)
No family members of Seller working in key positions. Exceptions to the rule of course, but this bites you more often than not.
Small marketshare. (hard to grow when you've already got 90% of your potential customers)
Industry tailwinds. People don't put enough emphasis on this. Pick a sector likely to grow more than inflation over the next 10 years and your life and growth will be 10X easier than operating in a shrinking sector.
Competitive moat, barriers to entry. These can take many forms, but I like stuff under the radar without stiff pricing competition that are hard to easily replicate.
You can't imagine a gen Z kid creating an app within the next 10 years that puts you out of business.
Fragmented industry with lots of Boomer owners you could potentially absorb or buyout as they retire next 10 years.
Talent is "gettable" to do the work needed to grow as long as you pay well. It's hard everywhere but make sure it's not nearly impossible in your industry and geography if you want to grow.
Recession resistant: think "necessity". You want something that does just as good or even better in downturns when buying in hot markets.
Low Capex requirements. Can scale easily by reinvesting its own profits without having to constantly take on more debt to grow.
Not fully modernized. Look for paper file cabinets, no e-commerce, mediocre websites, etc... as those can mean big opportunities for growth and cost savings / efficiency gains.
Owner and employees seem generally happy. Vibe check is important.
Walk away if everything is perfect on paper but everyone looks miserable.
Not completely dependent on one vendor. This rules out many franchises. Imagine owning a Subway when people discover Jared is a pedo. Captive insurance agencies as well... sometimes they just aren't price competitive and you're screwed. Can you get what you sell from >2 sources?
Not completely dependent on one customer. Like to see biggest customer under 10% of revenue ideally.
Improves the lives of your customers. Seriously. What does it profit a man if he gains the world but loses his soul? Pick something that you can be proud of and you'll execute with so much more passion and self-esteem. It's not all about $ it's about showing up with a full heart.
If you can get most of these attributes and buy it for 2-4X earnings... it's the deal of a lifetime and you need to jump on it and get cranking.
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