Criteria for evaluating PE investments - need help

Each shop has its own criteria but here are our main ones, the actual list is pretty long. Keep in mind that these are relatively flexible and in no particular order:

*Many firms have a minimum trailing EBITDA (ours is $2.5M) *3-5 years cash flow positive *Fragmented industry *Ability to leverage the PE team's expertise *Strong management team *Large debt capacity (lots of collateral) *Potential for organic and acquisition driven growth

You don't necessarily need/want a management team that is financially tied to the company. Remember that any equity you give the management is money that is not coming back to the firm.

These also may change depending on the size of transactions the PE firm runs down. My experience is in middle market.

 A talented and committed management team, with meaningful financial participation and a successful track record;  A market leader with a defensible position;  A diversified customer base;  An appealing range of products and wide distribution channels;  Participation in a growing market;  Product lines with extended life cycles and low obsolescence risks; and  Sustainable operating profit margins of ten percent or higher.

• Customer concentration
• Supplier concentration
• Margin trends, gross and EBITDA
• Change of control provisions, lease terms, renewal options
• Macro environment, sector dynamics
• Competitions

Hey guys,

Thanks for the responses

So initially I would be looking at sales. Why do I care about EBITDA at the beginning versus say their free cash flow in order to see that they are profitible to the point that they have positive net after operations, investments and financings. Do I care to see free cash flow or is this something i would fix as a PE firm.

At the same time I am evaluating management, the market, their market shares, making sure they have sustainable sales growth potential, solid customer base, brand recognition and 3-4 years of positive free cash flow. So assuming that I like what I see up to this point...what is the next step.

I assume that there is some min. return on on investment that any PE firm looks for when getting involved with a company. At this point would I build up a model to forecast the EBITDA over the length of the holding? I am thinking at this point, the drivers for the model would be based on the industry experience of the professionals at the PE firm. For example - the firm may know that they can reduce cap ex and change the working capital while still growing the business at some predetermined rate (based on their experience) to yeild greater FCF.

So based on experience, the firm might determine to recapitalize the company they are evaluating and take on more debt. In such a case, would I ultimately be looking for the ending equity value of my share so that I could discount it back at a rate of return that I am seeking to determine how much to pay for the equity shares in the company today.

How does the analysis change if i am considering PIPE financing, LBO, MBO, growth capital e.t.c.

Thanks for all your help.