SMB ETA: Evaluating 2 opportunities
Little background and a request for candid opinions: I’m a Chitown trading jock. Big 10 degreed in econ. Mid-career, late 30s and I'm looking for the next adventure: buying a small business.
I realize this PE forum is for you big swinging D's, but hoping the experience and insight here can help me make a better informed decision. No one else in my professional network has done ETA, and I don't have an MBA. A few of my techy MBA buds have been useless on this topic.
Been negotiating LOIs on 2 deals, and looking to lift the seller’s offer on one or other. Both deals approx. $1 million adjusted EBITDA and looking to trade around 4x.
One business is a B2B light manufacturing/distributor ($6m revenues) inventory-heavy, asset-light. The other business is industrial services ($3m revenues), asset-heavy, inventory-light and a mix of B2C and B2B. COGS running higher for the manufacturing co, hence the significantly higher gross margin for the service biz.
The manufacturer probably has a slightly better economic moat and higher barriers to entry, but likely slower growth potential; market is mature with well-entrenched, big established public players.
The service co has lower barriers to entry, but the market is more fragmented with smaller industry players and is more roll-up friendly. Organic growth likely higher with the service co.
So, given this scenario: two businesses, same EBITDA, same multiple, differing gross margins: which would you want to buy and why?
Feel free to ask any other questions.
Thanks for reading,
Eddy
Hi EddyD, don't worry, the WSO Monkey Bot is here.... I'm hoping one of these links will help find your answer:
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