Business model, EBITDA drive business buyers

By Jim Kendall

This column originally appeared in the July 13, 2015 Daily Herald

                You likely can count the number of business buyers looking for a fixer-upper on one hand, with at least your thumb left over. Performance counts.

The IT sector buyers Hao He knows “look at the business model,” she says. “What’s the customer base? Are there good products, with potential?” In particular, He says, buyers look at “recurring revenue (and) the predictability of cash flow.”

He is senior vice president business development for Global IT M&A Forum, a Walnut Creek, CA company that brings middle market IT buyers and sellers together in two ways: One-day, private face-to-face meetings that He, based in Chicago, likens to speed dating and ExchangeNet, an online marketplace.

He may be an IT specialist, but her observations seem valid in virtually every industry: The business model, revenue and cash flow are transaction drivers.

Different buyers take varying approaches. Woodlawn Partners, Glencoe, is a buy and hold partnership that looks at transition issues – for example, says partner and co-founder Greg Bregstone, seeking “the business owner who wants to plan for retirement.

“We want to buy when the business is still strong and the owner still there” to help with transition.

Woodlawn Partners is a private equity group that has been in business six years. Its oldest purchase has been in the portfolio five years. The partners buy, roll up their sleeves – or bring in strategic partners to run the company on a day-to-day basis – and get to work.

The intent is to grow the companies they buy.

What catches Bregstone’s attention? Woodlawn looks for EBITDA (earnings before interest, taxes, depreciation and amortization) of $1 million or more. But that’s not all.

* Is revenue consistent or up and down?

* Does one customer account for too much business? Is there too much reliance on one supplier? Is the service market local or national? Is the company’s market entirely within one sector – energy, for example? Is there one product or a full line?

* Is there a unique value – patents, for example, or proprietary products that are hard to replicate? Is the business a market leader that would make entry by a competitor difficult? Is a strong management team in place?

* Is the seller open to Woodlawn’s ideas?

There’s more, but you get the idea.

Kevin Cavanaugh is president of Vandegrift Consulting Co., a Barrington merchant services advisory. He hasn’t bought a business yet, but he’s looking. “The big thing,” Cavanaugh says, “is whether their processes are at the highest quality level possible.”

With some preference toward durable goods, Cavanaugh is looking for “a lot of institutional knowledge,” people on board who, for example, “can do a quick fix if the line goes down.”

But he also asks, “Is there a good client base? Good existing order flow?”

Cavanaugh’s optimum candidate might be a family owned business with no successors in place – and little interest by family members of coming aboard.


© 2015 Kendall Communications Inc. Follow Jim Kendall on LinkedIn and Twitter. Write him at Jim@kendallcom.com. Listen to Jim’s Business Owners’ Pod Talk at www.kendallcom.com.