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What the "Big Buyers" Want

At The Firm Advisors, our associates take anywhere from 15 to 25 calls a day from big buyers with significant capital who are searching for an acquisition that will allow them to make money for the members of their groups. This can often net higher returns than the average stock market investment, which (in a good year) will return about 7%. Business profit margins, depending on their clientele and services, can range anywhere from 10% for industries like staffing, to over 50% for IT-related companies with no hard product to sell. Below, we’ll outline the most common requests from Private Equity Groups across North America.

 

Recurring Revenue

This is the most common request we receive. Recurring revenue simply means that the company doesn’t have to continuously “win” new business in order to keep the money flowing in. Common businesses with this type of revenue include Managed Service Providers, any time of service-based business with ongoing maintenance agreements, subscription services where customers receive a product or service monthly (such as a gym membership) or retainer-based services such as marketing, law firms, or energy consulting.

 

Management in Place

Many larger firms like profitable companies where the owner is not involved in the day-to-day operations of the business. Having an owner who has successfully built a team who can carry out the company’s work without constant intervention is a key factor for any business’s valuation. This can vary – some PEGs will hire an “operating partner” to run the business once the existing owner exits – but if you have a General Manager, COO or Operations Manager in place, the transition is all the more easy. Think about who will do your work when you’re gone. If there is an employee who could handle most of the operations, begin shifting those responsibilities to him or her as soon as is feasible.

 

EBITDA over 1M

EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. Basically, it’s the company’s net profit, plus the interest paid on any existing loans, taxes paid to the federal or state government, depreciation write offs, and amortization from any previous purchases. Hitting the 1M mark makes your company a good target for Private Equity Groups (PEGs), who then take the proceeds from the business and distribute it among their investors.

 

Profit Margin Above 10%

Businesses with higher profit margins are more likely to get high offering prices from PEGs because it simply takes less work to generate the take-home pay related to the business.

 

Consistent Revenues Over 5M

Showing a history of consistent revenues is important, and the 5M figure is a common benchmark to show the company’s ability to sustain any blips in the market. Typically, this figure is looked at over a three-year timeframe.

 

For those owners who are looking for a large exit event (a.k.a. a nice price for the sale of your business) these factors can affect what your future will look like.

 

Curious what your business is worth today? Contact us at 402-998-5288 or info@thefirmadv.com for a complimentary valuation.

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