Our criteria set is built on real lessons learned from scaling an operating company and selling it to a publicly-listed strategic.
The criteria below represent business characteristics we value. Because most businesses will not meet all criteria, we are looking for deals that conform to the majority of the categories below.
First Screen — Revenue
Revenue Quality
Revenue must be high quality on the revenue-quality-spectrum (LINK). We prefer contracted, recurring revenue or revenue that could become recurring, contracted with minor improvements to its current form. Some forms of re-occurring revenue are acceptable if customers are reliant on the company in a unique and sticky way.
Growing vs. Slowing
Revenue needs to be growing rather than slowing, with market tailwinds helping fuel natural growth. The revenue should ideally be added to the business by a system that does not rely on the owner selling all the new business. There is an outside sales team responsible for at least a significant portion of the sales.
Pricing Power
The company has enough sway over its customers to raise prices year over year without losing a lot of business. If the business has recurring, contracted revenue then the contracts have annual price increases written into the terms that at least outpace inflation.
Second Screen — Profitability & Retention
Industry Average Earnings
We like businesses that are able to set up a structure that sustainably earns the margins that its industry offers, or achieves slightly higher margins for enduring reasons. We would shy away from a company that either is too high or too low on this metric, as it would suggest either underperformance or potentially unsustainable high performance.
Above Industry-Average Retention
We believe that businesses are most stable and valuable when they offer an exceptional experience to the customer that keeps them coming back. This suggests the operations of the company are in great shape and are running smoothly enough to sustain a transaction without inhibiting a strong growth path.
High Gross Margins
Businesses are typically most stable when they earn healthy gross margins on the core products and service, and even higher margins on ancillary products/services or follow-on sales. Higher gross margins means there is plenty of left over room to invest in overhead and achieve long-term customer satisfaction.
Third Screen — Cash Flow
Predictable
The company must convert revenue into cash on a predictable cycle, so as to avoid cash crunches. Ideally, this means the business is tracking its DSO and it doesn’t fluctuate by more than 10 days month-to-month. Customers are not larger enough to single-handedly cause a cash-crunch if one does not pay on-time.
Fast
It must convert the revenue quickly, ideally within 45 days. The company has a written process and a department built out that automates the system of collecting cash so that it is not up to the owner of the business to hunt down collections. The company has a history of effectively collecting on overdue balances without aid from a legal process or collections agency.
Supports Growth
The company generates enough free cash flow per month to support its own growth, rather than inhibit it. The company is not reliant on additional debt or equity injections to grow at a healthy rate of 10-40% per year. The company has a history of being able to effectively finance its growth with its own resources.
Fourth Screen — Team & Culture
Mission, Vision & Values
The company aligns with our Mission, Vision and Values. The seller has worked hard to create a culture where people are valued, have been retained by the company for long periods of time and are bought-in to the direction the company is headed. The team is incentivized properly and is not waiting on a large collection of “catch up” raises.
Team Size and Org Chart
The company must be large enough to where the acquirer is not buying a job. The org chart should look similar to the larger players in the industry and not have too many special roles or non-conforming positions within the company. The team has grown steadily over time and has been trained well to accomplish the objectives of the company.
Org Chart
The company has a hiring and onboarding system in place and that has historically demonstrated the ability bring on talent when new sales demand it. There is a thorough onboarding process that sets up the HR function for success. All legal, ethical and business guidelines are being met by the application system and the individual elements of hiring and onboarding are well documented.
Fifth Screen — Market Position
Future Customer Opinion
The business’s product or service is not a line item that customers are currently trying to remove. For instance, the service is not a “necessary evil,” but rather is a service the customer enjoys purchasing. The product or service is a smaller line item on the customer’s list of expenses.
B2B
Your customer base is a set of businesses, not individuals. Selling to these customers involves managing or creating a sales organization of people who can meet virtually or face-to-face and convince a customer to buy the product. It doesn’t include large government contracts or rely on handshake deals with personal relationships.
Stability of Industry
The company is in an industry that is growing at GDP or better, experiencing tailwinds. The industry is not at risk of major regulatory changes and does not have a a high risk of innovation disruption that could eliminate whole product/service lines. Other businesses in this industry have experienced long periods of success without unpredictable, frequent peaks and valleys of performance.
Sixth Screen — Financial Metrics
Reasonable Multiple
The seller is seeking a reasonable multiple for his/her business and has done the proper research to know what a reasonable market multiple is at the time he/she is looking to sell. If no research has been done, the seller respects the average multiples paid for businesses similar to the one being evaluated.
EBITDA
The company’s EBITDA is between $750k and $5mm. It is large enough to where the acquirer is not buying a job but not so large that the acquisition will not conform to our target size for growth potential and multiple expansion. EBITDA is consistent year over year and growing over the past three years in varied market conditions.
Customer Concentration
Revenue billed to your top five customers does not make up more than 30% of your total annual revenue. Your top customer is no more than 10% of revenue and there are at least 20 customers total in the business. The customer base is varied enough that varied market conditions would not eliminate a large collection of customers tied to the same macro factors.
Tell us about your business.
If you meet 4/6 of these screens, we’d love to talk with you.