Profile of a good business to buy.
1. Consistent and predictable growth in cashflow
2. Good balance and recurring annual revenues (not project or “overflow” revenue, limit
customer concentration for top 3 < 20%); avoid channel concentration or revenues to
distributors
3. Margin stability and ability to increase prices whether based on increase raw
materials or market
4. Solving problems for customers and the supply chain
5. Limit “lumpiness” of revenues from year to year
6. Scalability of business on a fixed cost structure: high contribution dollars for
incremental sales
7. Brand recognition at the consumption point in supply chain
8. Differentiated product vs. commodity
9. Customers buy on “perceived value” vs. price --- perceived value exceeds cost = good
margin
10. Stable gross margins with potential for high contribution margins on increases in
revenue
11. Gross margins > 25%, EBITDA margins > 10%
12. Revenues across broad product base (limit concentration of revenue in one product or
division)
13. Revenues should be balanced seasonally and serve non-cyclical market > $100 million
per year
14. Products & intellectual property should be leading the market (guard against
supplying derivative markets i.e. volume exists because of activities in a primary
market)
15. Proprietary products
16. Markets served should have limited exposure to cyclicality
17. Long Product Life Cycle vs. Needs to recreate Product Offering every year
18. High Replacement Cost as a supplier vs. Little impact on product availability to your
customer because of a change in supply base
19. Foreseeability of Revenue/Margins/Backlog (spec in platform) vs. Low
Predictability/Visibility
20. Stable Market Demands vs. Volatility of Consumption, Discretionary & Necessary
21. Ability to pass-through increases in raw materials or surcharge on quoted prices
22. “High Position” in Supply Chain close to end use vs. Derivative Market or Temporary
Market
23. Manageable CapEx spending (same fixed assets for many customers), low working
capital needs
24. Excess and available fixed assets / plant capacity
25. Freight cost, discounts and allowance not to be used to land purchase orders
26. Management succession planning and depth of management in place (no “key-man”)
27. Institutional business – customer relationship, not personal to any one (group)
employee(s)
28. Defensible market position / differentiation from competition
29. Limited litigation history (settlements preferable), low warranty or legacy liabilities
30. Limited environmental issues or remediation history
31. IT systems and finance staff strong
32. Bad debt experience limited and reserved for and aged receivables covered by reserves
33. Interim period financial statements representative of actual annual performance –
little year-end adjustments to income statement or balance sheet are a result of
physicals or GAAP audits
34. Audited financial statements
35. Limit “add-backs” to EBITDA; don’t use company expenses to fund personal
consumption
36. Able to sell assets in a sale transaction and not insist on a stock deal – stock deals limit
buyers ability to amortize goodwill and reduce taxable income. Use LLC or S-corp
elections that are more than 10 years old
37. Engineer a growth strategy that will make the business “the perfect acquisition” for a
strategic buyer by aligning product lines with strategic buyers’ divisions.